Ryerson Holding Corporation

and welcome to the Ryerson Holding Corporation's fourth quarter 2022 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 at any time. I would like to turn the conference over to Jorge Berstein, Vice President of the Finance at Ryerson. Please go ahead, sir.

Good morning. Thank you for joining Ryerson Holding Corporation's fourth quarter and full year 2022 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 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&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 and are not limited to those set forth under risk factors in our annual report on Form 10-K for the year ended December 31, 2022 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 to the most directly comparable GAAP financial measures is provided in our earnings release filed on Form 8K yesterday, also available on the Investor Relations section of our website. I'll now turn the call over to Eddie.

Thank you, Jorge, and thank you all for joining us this morning. As we reflect on the fourth quarter and full year 2022 results, I want to start by expressing my heartfelt appreciation to our 4,200-plus strong Ryerson team for their hard work and continued dedication, which now includes new businesses added to Ryerson's family of companies in Ford Tool Steels, Apogee Fabrication, Howard Precision Metals, and Excelsior Metals, as well as our first additive manufacturing investment in Freeform Technologies. Our team is integral to our mission to deliver great customer experiences which we provide through our network of intelligently connected industrial metal service centers. Industrial metals are the recyclable, 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 well-being. The fourth quarter was a period of rolling headwinds and reemergent tailwinds as we saw a continuation of the countercyclical environment for most of the quarter. However, prices for the metals commodities in our product mix started to find support in November and have continued to see steady increases into the first quarter of 2023. Domestically, we saw volumes experience familiar seasonality via slowdowns in industrial purchasing, as well as distortions requiring rebalancing that had accumulated earlier in the year, particularly with respect to stainless steel and carbon steel. While the pricing and demand landscape still obeys the laws of general cyclicality, I would note the more important changes in Ryerson's atmospherics, as well as those pertaining to industrial metals, which support our optimism about our company and industry. During 2022, we set the stage for Ryerson's future and displayed that we are a much stronger company through the cycle as we saw higher highs as well as higher lows during a period of heightened volatility catalyzed by ongoing pandemic and geopolitical distortions. While this was another transformational year for our business to employ an overused, but in our case, true descriptor of our progress, our accomplishments have come from years of intentional efforts to eliminate our high-yield debt, improve our capital structure, and invest in the next stage and phases of our strategic business plan. I can't fully express to you in this script how great it feels to be high yield debt free and better yet, how it feels to see the onset of counter cyclical conditions knowing we can continue investing in our business through the cycle while confidently returning capital to shareholders. Ryerson has come a long way over the past decade, but the opportunities within our sites to innovate and bring forward an industry-leading operating model for all stakeholders is now front and center free of legacy burdens. On September 9th, we shipped our first customer order from our new state-of-the-art service center in Centralia, Washington, and expect our new CS&W University Park Service Center to be operational in the third quarter of 2023. On November 8th, we celebrated 180 years operating under the Ryerson brand at our investor day in the New York Stock Exchange, where we showcased our operational, financial, and digital initiatives and unveiled our next phase financial targets. In December, we were proud to publish our inaugural ES&G report, which showcases the integrity with which Ryerson operates and outlined important sustainability initiatives we have underway for a cooler and cooler future, including our target of reducing Scope 1 and 2 emissions by 80% by 2040, as well as the release of our proprietary emissions illuminator application. Our team efforts over the past few years, and especially in 2022, have culminated in modernizing our service center network, transforming our balance sheet, and making material down payments toward Ryerson's next stage of growth. Emerging trends in onshoring, shifting trade paradigms, and fiscal investments in infrastructure, climate transitioning, and semiconductor manufacturing will likely mean the beginning of an imperative metals-intensive overhaul of our society and economy. In this new paradigm, Larrison's investments in value-added manufacturing, customer-centric connected distribution networks, and modernized operations position us for a bright future for all of our stakeholders. With that, I'll now turn the call over to Mike to further discuss the pricing and demand environment.

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 to address their needs throughout the business cycle, as well as anticipate where our services, equipment, and capabilities can add value. In the fourth quarter, we saw shifting trends in pricing for the metals commodity prices underlying our product mix. While decreasing through October, stainless and aluminum pricing increased in November amidst firming international demand, increased energy, and input costs, as well as tighter supply at LME warehouse inventory levels. Closer to home, domestic hot-rolled coil, or HRC, continued its decline for most of the quarter, finding support in December. Since that time, HRC prices have steadily risen, headlined by six price hikes from mills and longer lead times, also helped along by falling import levels and increases in iron ore and scrap pricing. Despite the late quarter price increases, due to fourth quarter, U.S. Midwest HRC declined 4%. On the other hand, due to the sharp price increases starting in November, LME aluminum increased by 8% and LME nickel prices rose by 36%. These price changes translated to our metals mix meeting our guidance expectations with an 8% sequential decrease in average cell price to $2,770 per ton. Looking to the future, we see supportive demand factors influencing pricing, including the resurgence of demand for industrial metals internationally, particularly from China's economy reopening and the end to their zero COVID policy. However, domestically, the fourth quarter saw holiday seasonal slowdown in manufacturing. Combined with the effects of higher interest rates and high inflation continued to impact the demand for industrial goods. The slowdown in demand in the U.S. was reflected in key macroeconomic indicators. United States industrial production continued to decelerate through the fourth quarter. The U.S. Purchasing Managers Index, or PMI, after continuing to indicate slowing growth since the second quarter, declined below the growth threshold of 50 in November. In the fourth quarter, North American industry shipments, as measured by the Metal Service Center Institute, or MSCI, contracted 8.3% quarter-over-quarter, compared to Ryerson North American volume declines of 9%. However, on an annual basis, North American MSCI shipments contracted by 2.3% compared to Ryerson's shipments contracting by 1.9%, implying a slight market share gain. Early first quarter indicators point to improved demand trends from the fourth quarter of 22. In addition to typical sequential seasonal trends, factors influencing our sales volume and pricing include incrementally normalizing supply chains, interest rate policy, and inventory restocking as metal pricing appears to have inflected from the mid-quarter reference bottom. Similarly, our industrial customers, while still evaluating lag effects from current and future Federal Reserve interest rate increases, are still working through durable order backlogs. Turning to our end markets, End market performance saw normal seasonal softness. As such, Ryerson noted sequential shipment decreases across all of our end markets in the fourth quarter of 2022. On a full year basis, commercial ground transportation, oil and gas, HVAC, and construction equipment increased sales volumes, while consumer durables and food processing and agriculture equipment saw slight volume declines. Finally, I would like to echo Eddie's earlier statement. The investments we have made in our technological capabilities and distribution network, including the new emissions illuminator app and service center in Centralia, are geared for the current and future needs of our customers. As our customers have experienced over the past few years, changes in supply chains can have large impact on a 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 2023 and beyond, we are excited about the work we can do with our customers and the future that we can build together. With that, I'll turn the call over to Jim for our fourth quarter results and first quarter outlook.

Thanks, Mike. And good morning, everyone. I'll start by addressing the LIFO charge we took in the fourth quarter. We had previously expected LIFO income in Q4 based upon trends in carbon steel, aluminum, and stainless steel-related indexes from March through November in carbon and for aluminum and nickel from June through October. We note that carbon steel disinflationary trends and resulted LIFO credit impacts behaved as modeled and were consistent with broader manufacturing leading indicators. For aluminum, spot index and futures pricing stabilized in October and moved higher through year end. For nickel, the inflection was more dramatic as the price of nickel increased by 50% from trough to peak during the September through December of 2022 interval. Although this caused an unexpected LIFO expense for stainless on higher stainless inventory levels, let us say we weren't disappointed at all in the positive shift in stainless price fundamentals, but had to appropriately recognize the Q4 2022 gap estimation methodology impacts on this welcome change in the nickel and molybdenum markets relative to how it looked through a Q2 through Q3 forecasting lens. These factors then led to average inventory costs ending the year higher than we had projected, and our annual LIFO credit was lower than previously anticipated. This led to LIFO expense of $34.6 million being recognized in the fourth quarter. Inventory days of supply in the fourth quarter ended at 90 days. This, coupled with commodity cost inflections upward in the back half of the quarter, led to the average costs in inventory remaining elevated. Although this had a one-time negative impact to margins in the quarter for the annual true-up, increased commodities future prices into the first quarter for our products provide a more promising outlook for the start of 2023 than previously expected. Looking to the first quarter of 2023, we expect volumes to sequentially increase slightly more than typical seasonality. As such, we expect first quarter revenues to be in the range of $1.37 to $1.43 billion with sales volumes expected to be up 10% to 12% sequentially and average selling price to be down 1% to 3%. Based on these expectations, we forecast adjusted EBITDA for the first quarter of 2023, excluding LIFO, in the range of $78 to $82 million and earnings in the range of $0.98 to $1.06 per diluted share. In the first quarter, we expect a life-full expense of approximately $5 million. In the fourth quarter, we generated $182 million of operating cash and ended the period with $367 million of total debt and $328 million of net debt, a decrease in net debt of $98 million compared to the third quarter. Ryerson's leverage ratio increased slightly quarter over quarter to 0.6 times, but remains low historically and at the low end of our leverage target range, while the company's available global liquidity is at historic highs and increased slightly quarter over quarter to $909 million. For the full year, we generated $501 million of operating cash, and decreased net debt by $260 million. In the past year, we transformed the capital structure of our business by redeeming $300 million of our 8.5% senior secured notes, which retired all our existing high yield debt and is expected to save Ryerson over $25 million in annualized pre-tax interest. Going forward, as we continue our focus on operational and financial efficiency, we will use our $1.3 billion revolving credit facility strategically to fit the nature and needs of our business. In terms of shareholder returns, Ryerson returned approximately $7 million in the form of share repurchases and dividends in the fourth quarter. Specifically, we repurchased close to 33,000 shares of our common stock, returning approximately $1 million to shareholders, and paid a quarterly dividend of $0.16 per share, amounting to a cash return of approximately $6 million. On a full year basis, Ryerson returned approximately $70 million to shareholders, which represents $1.7 million of shares repurchased and $0.54 of dividends declared per share. Finally, we announced a first quarter of 2023 cash dividend of 17 cents per share, which is the sixth consecutive increase in our quarterly dividend. With this, I'll turn the call over to Molly to provide further detail on our fourth quarter financial results and our CapEx plans for 2023.

Thank you, Jim, and good morning, everyone.

In the fourth quarter of 2022, Ryerson reported net sales of $1.3 billion, which was at the high end of our guidance range. In the same period, gross margin of 12.7% was impacted by a LIFO expense of $35 million as average inventory costs came in higher than forecasted on better than expected commodity price inflection later in Q4. Excluding LIFO expense, gross margin was 15.3% as cost of goods sold reflected consumption of higher cost of materials through our metals mix while our average selling price declined in line with guidance. On the expense side, warehousing delivery selling general and administrative expenses increased 2.1% to 190 million. primarily driven by operating costs related to newly acquired companies. For the fourth quarter, net loss attributable to Ryerson was $24.1 million, or $0.65 for diluted share. This includes reorganization expenses of $5.3 million, primarily related to ERP system conversion costs as well as relocation expenses for our new state-of-the-art facility in Centralia, Washington. For the full year, net income attributable to Ryerson was a record $391 million for $10.21 per diluted share. This includes a loss on the retirement of debt of $21.3 million. gain on sale of assets of 3.8 million, and a bargain purchase gain of 0.6 million. Excluding these one-time items and the associated income taxes, adjusted net income attributable to Ryerson was 403.6 million, or $10.54 for diluted share. In the fourth quarter, Ryerson achieved adjusted EBITDA, excluding LIFO, of 28.7 million, and generated $148 million in free cash flow. For the full year 2022, Ryerson achieved adjusted EBITDA excluding LIFO of $582 million and generated $404 million in free cash flow. Capital expenditures were $34 million in the fourth quarter, and for the full year, we invested, excluding acquisitions, approximately $105 million in our business, in line with our budget. This amount comprises both maintenance and growth projects, including service center modernizations in Centralia, Washington, and University Park, Illinois. As we look forward to 2023, we anticipate full-year capital expenditures to be around $95 million. This is comprised primarily of our base maintenance and growth CapEx spend, as well as spending on the completion of our state-of-the-art facility, and University Park, which replaces the previously sold CS&W facility in Chicago. We look forward to the opening of this facility in the second half of 2023. And with this, I'll turn the call back to Eddie.

Thank you, Molly. As we look forward to 2023 and the next stage of Ryerson's advancement, we would like to emphasize that our efforts are underpinned by our mission, which is to create great experiences for our customers, employees, shareholders, suppliers, and communities. Our ongoing development of an investment in an intelligent network of value-added metals service centers delivering industrial metal solutions with joy, speed, value-add, scale, and consistency is the core of these efforts. Who doesn't want and need better experiences in every facet of life and work? The world of today and tomorrow that provides for a better quality of life and broader-based prosperity will be largely created and built with recyclable and sustainable industrial metals. That is why metal matters Agile experience when visiting us at Ryerson.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 that it creates, and let's keep progressing together.

With that, we look forward to your questions. Operator?

Thank you.

If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And our first question is going to come from Phil Gibbs, KeyBank Capital Markets. Hey, good morning, ID&T.

How are you?

Hey, good morning, Phil. How are you doing?

Doing well. Thank you. Um, fourth quarter operating expenses, I think 190 million plus from what I remember, I think Molly called out 5 million of ERP, but still probably would have been a little bit higher than we thought, uh, relative to where you were in the third quarter with the lower volume. So what, what's the level of operating expense that we should expect for, um, for the first quarter relative to the fourth? Because I know that there can be some volatility in that based on true ups.

Yeah, of course. I mean, we have to account for the businesses that we acquired and sort of some of the lagging effects of those expenses post-acquisition, you know, even though we're really happy with the synergy cases that we're seeing early in the post-acquisition period. And I would also say that We lost a little bit of expense leverage in the fourth quarter just given the dip in revenue, but we still feel that we're operating within our best operating traditions of being able to realize expense leverage, particularly with some rebound in price and then some of the initiatives that we have underway to take costs out, especially non-value-added costs and variable, you know, variableization of our cost structure. So we expect expense leverage certainly in Q1.

What about just the absolute level of operating expense versus that fourth quarter baseline?

Yeah, I mean, we're seeing some OPEX costs come down a little bit in transportation, a little bit in energy. There are some what I'll call remaining inflationary cost impacts that are coming through the OPEX P&L. But I really think our management of those expenses is going to be strong as it's as it's been historically. I can ask John Ward to provide a little bit more color on that.

Thanks, Eddie. Hi, Phil. From an expense perspective, when we look back at 2022, first off, our teams did an outstanding job of managing through the supply chain challenges and making sure that we had all manufacturing supplies, operating supplies to provide service to our customers. With that said, the area where we saw the greatest inflation was around fuel, with diesel being up substantially in 2022. That is forecast to come down from a high of over $5 a gallon to about $4.50 a gallon this year. So that's an area that we do expect to see benefit. And additionally, our team in central dispatch continues to use our digital tools looking across the network to combine loads and to maximize utilization of our fleet.

And just a couple other data points. Certainly, we certainly look to capture the R or the restructuring impacts of ERP conversions and also facility conversions as we moved from Renton to Centralia. and even some what I'll call very early pre-operating and startup costs in University Park. And as those things transition through, our steady state operating cost environments for those modern and new facilities should help bring our overall cost curve down as well.

Perfect. And then looking into the first quarter from the fourth, what type of what type of margin improvement are you expecting on a LIFO or FIFO basis, or however you're looking at it or thinking about it? And I also know that typically when hot roll prices rise, particularly as much as they have, that can be a good thing for you all, but it does take a little bit of time to filter through given the quarterly lag. So I would have thought you would have actually seen some margin pressure increase given you're probably still selling at some old prices in the sheet side. So just maybe kind of dissect all that.

Sure. I'll take a first cut at it. So you're right, Phil. I mean, certainly you and I have known each other for a long time and talked about sort of the phases, the oscillations in the industry, especially when you have a program book of business and you've got a spot transactional book of business. Spot transactional business is usually more responsive as replacement cost changes relative to the average cost of inventory that you have. So you see more positive effects at that inflection and turn in that spot book. And then, of course, your program book takes longer to adjust. So for us, it looks like a tailwind, really, from mid-Q2. Right now, if you project through, you would see contract price improve on that lag while transactional margins continue to improve. So based on our 50-50 split book of business, it's a good tailwind for us, assuming that this mini cycle extends and prices continue to move higher or at least maintain their present levels.

Thank you.

And again, if you'd like to ask a question, it is star one. And our next question comes from Katja Jansky. from BMO Capital Markets.

Hi, thank you for taking my question. Can you talk a little bit about the stainless side? Specifically, I know the prices are increasing, but how are the inventories and what are you seeing right now?

Yeah, good morning, Katia. I'm going to have Mike Burbach give me a healthy assist here in just a moment. What I would tell you about stainless, it was really a... It was puzzling in this way. And the stainless market was so tight for really, I'd say, 12 to 15 months. It was extraordinarily tight. It was very much an availability market if you really track through the first quarter of 2021, probably through April or May of 2022. And then you started to see inventories accumulate. And imports were very, very high, particularly from Taiwan, for example. And the channel got glutted. the channel really got glutted. I mean, we haven't seen stainless industry inventories above five months. As a matter of fact, in all my time in the industry, I haven't seen industry stainless inventories above five months. And so there was certainly a glut, and you had import prices that were firmly in the market. So even as stainless inflected, even as nickel inflected and molybdenum is tight, Even though the underlying cost drivers of the product were improving, you still had to clear this major inventory overhang against demand that was falling, particularly on the consumer side, where now we've started to see some rebounds and some positive inflections in the market, both on the price side and on the demand side. Q4 certainly saw all those things come home to roost. at one time until you could kind of clear that and rebalance the market for stainless, which is still in progress but showing signs of returning to some reasonable health. Mike? Hi, Katja.

Thanks, Eddie. Yeah, I think you hit it pretty good. You know, the biggest issue that hit us really, really in Q3, Q4, second half of the year was that import piece. There was a pretty decent bubble. that came in after months and months of a very tight supply. So we went from a situation of very little channel inventory to far too much. And so fast forward to today, the import piece seems to have normalized considerably. And the amount of imports coming in are back to historical levels, if not lower than normal, as things have been correcting themselves. We're seeing overall inventories in the industry start to tick back down. Activity so far in Q1 in the stainless side is ticking back up, and so that normalization is starting, but it still has a few moments to go.

Okay, and maybe just on your cash conversion cycle, it has been ticking up. Can you talk a little bit about that, and how should we look at it going forward?

Yeah, I'm going to have Jim Claussen chime in here in just a moment. Let me just say this. I mean, we could have done a better job when it came to our cash conversion cycle, and we have higher expectations for ourselves when it comes to managing that component of our business. However, I would say this. Given the pandemic hangovers and the extreme oscillations and gyrations in that working capital environment in terms of past due deliveries of metal and And then certainly trying to manage on the customer side what I would call a difficult flow through the value chain really for the entire industry. And I think you're even seeing it now in some of the dynamics that exist relative to price and demand. Just there's a lack of flow. You know, I heard a humorous metaphor that if everybody had to report out like the NFL reports out on their injury reports, you'd have all these different companies that would be telling you what their injuries are. And so I just think there's a lack of flow throughout the supply chain, and that certainly showed up in working capital management in the second half of the year. But we expect to get back to our historical and really our own performance expectations when it comes to networking capital management and where that cash conversion cycle should be. Jim?

Yeah, thanks, Eddie. Good morning, Katja. I think really, you know, Eddie – said it really well there. I think on the cash conversion cycle uptick, we really saw it on the days of supply on the inventory front, you know, as noted as we moved up, you know, a little bit outside of our target range of 70 to 75 days and would expect that to moderate. On the AR side, expect that to perform seasonally. That's been very consistent across the board. So it was really an inventory driven event.

Yeah, the AR performance, has been outstanding and continues to be outstanding on the inventory side. We believe we can do a better job just in terms of managing through some of these distortions that have turned out to be pretty protracted.

Okay, thank you very much.

Thanks, Katya.

I have no further questions in the queue. I'll turn it back over to you.

Thank you for your continued support of and interest in Ryerson.

Please stay safe and be well, and we look forward to being with you all in May for our first quarter 2023 earnings release and conference call.

Take care.

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