Ryerson Holding Corporation (RYZ) Earnings Call Transcript & Summary

Welcome, everyone, and thanks for joining the Ryerson presentation at our Industrials Conference, is our 11th conference. I'd like to introduce Eddie Lehner, the President and CEO of Ryerson; and also Molly Kannan, the Controller of the company. They're both on the line now. What we're going to do in terms of the format of this session is Eddie's going to do a formal presentation. Let us know if you don't have a copy of that already. It's available through the website. And then we'll have some questions at the end of that presentation. So I'll hand it across to Eddie now. Thank you very much.

Chris, thanks a lot, and I really appreciate the invitation to present at the DB conference. I'm Eddie Lehner. I'm the President and Chief Executive Officer of Ryerson Holding Corporation Inc. And with me today is Molly Kannan, our Controller and Chief Accounting Officer, and certainly our pleasure to be with all of you today, be with all of you today, and hope you're all safe and healthy. Ryerson, we've been around for 178 years. We have 100-plus locations. We have 42,000 customers across 75,000 stock items that we keep within our service center network. But I think the bigger story in this visual, and I know you can all appreciate this, is when you look at this network map, it's not just the Ryerson points that make up this network map, but it's all of the other sources of metal and processing that we access by digitally mapping to those access points where we can share inventory, both within our network but outside of our network. We can also share processing capabilities within our network and outside of our network to get -- to really put together great customer experiences at speed and scale and consistency and really mapping supply chains without having to really pay for goodwill and to buy every single company that does something that we may not currently have the capacity to do or it's a special niche or special type of skill or capability that we want to be able to access without having to make fixed cost types of investments. Moving on to the next slide. When you look at the diversity of our end markets, you can see that we're more levered to metal fabrication and machine shops, which is that general industrial category, more of that general industrial transactional category, certainly, industrial equipment, commercial ground transportation. And then we get into some of our, what I'll call, low teens and single-digit end market exposures, which are consumer durables, food processing and ag, construction equipment, HVAC, oil and gas and then sort of a catch-all of other type subverticals that don't neatly fit into one of these categories. So there was the pre-COVID world, and there is the COVID world that we're living in with all the other things that are certainly going on within our society today and around the world. But certainly, as soon as COVID really materially altered business conditions in the country, we had to go to a dual mandate. We established a dual mandate, which is really focused around the health and safety of our workforce to the extent that we could control it, but really understanding that if we put in the right business continuity plans and the right health and safety programs, specifically tailored to the COVID-19 pandemic, we can really bend the odds and the probabilities in our favor. And so right now, across all of our Ryerson facilities around the world and the U.S., Canada, Mexico and China, we've had 25 reported cases of COVID, and we've had 19 recoveries. And nobody's been hospitalized and nobody has been intubated. And we're very pleased to be able to report that to you. With respect to liquidity and recovery capacity, very important right away to understand what the -- not to understand, but to be able to really act quickly and effectively on the levers of working capital and also the levers around expense reductions to really meet the demand shock that occurred in late March and certainly through April and May and continues even through June, even though it has stabilized in some places, incrementally moving higher. So that dual mandate was really built around the idea of health and safety and safeguarding liquidity and recovery capacity and even building operating leverage looking beyond the crisis and looking to resumption of more normal business activities. Taking you through Slide 7, which I think is really an important slide is, if you look at Ryerson in terms of what's happened during transitions from maybe a mid-cycle year or even a better than mid-cycle year, all the way to a trough year or a severely stressed or depressed year. Certainly, we can go back and look at the great financial crisis of '08 and '09 and we can look and see how did Ryerson fare in '08, '09 and 2010. And then we had a good year in 2014. But then as we know, we went into a real deep tailspin over a 2-year period in oil and gas, but also in the general industrial marketplace and in metals and mining. Certainly, 2015 was a very challenging year. And then that went ahead and that spilled over into 2016, where you had an industry top line haircut of 30% over 2 years. And you can clearly see the changes in Ryerson in terms of the EBITDA generation ability, how we brought down our cash conversion cycle, what happened to the book value of equity and what happened to our leverage ratios. And now you can also see that in the midst of industry shipments that have fallen as we've gone through these comparative periods. Then we get into '18, '19 and the first quarter of 2020, and again, you can see that leverage ratios really don't spike to where they were in 2010 or 2015. You can see that our margin profile is starting to stabilize around our intrinsic target, even noting the volatility and the deflation that we experienced from, say, the middle of 2018 through 2019 and into 2020. You can also see vast improvements in the cash conversion cycle and our net book value of equity. And you can also see how that's buttressed our liquidity, built our net book value of about $13 a share based on what the shares outstanding have been since 2010. So our through the cycle leverage ratios continue to decline, and we continue to improve the operating franchise around a really good operating model that we think still has a high ceiling and a lot of runway as we move through this crisis, and we hopefully return to more normalized business conditions. And then let me go ahead and turn it over to Molly, and she's going to take you through Slides 8 and 9.

Thanks, Eddie. Good morning, and good afternoon, everyone. So moving on to Slide 8. This just -- it takes a look at our liquidity levels at Q1 versus Q4. So you can see we're still at very healthy liquidity levels at $396 million as of the end of the first quarter. Liquidity did come down from the end of the year as we did take the opportunity to repurchase $55 million worth of our senior secured notes. We did take advantage of the fact that our notes did trade below par for a period of time. And so the average discount we got was $98.5 million. So we did have a gain on our income statement of around $800,000 for the quarter. We did also draw upon our credit facility in March just as a response to the pandemic, just to make sure we have the ultimate flexibility to fund our operations through the crisis. And then moving on to Slide 9. This takes a look at some of the highlights of our Q1 financials. So we did achieve guidance on our adjusted EBITDA, excluding LIFO, of $34 million. We had a range of $34 million to $38 million. So we're within the range that we had provided, did see weakness on revenue year-over-year as average selling prices were down, especially in carbon and aluminum pricing as well as we did see volumes continue to decline into Q1. The metals industry weakness that we saw in 2019 continued into the first couple of months of the quarter. And then obviously, the coronavirus hit North America, and we did get impacted in the last week or 2 of the quarter as well as our China business in February and March. So when we see the weakness in our income statement metrics, that's when we really take the opportunity to capitalize on our countercyclical cash flow generation abilities. And you can see on the top right, we did generate about $73 million worth of cash from operating activities, also continue to manage our balance sheet really well and decrease days of supply by a day. And so our net debt levels were the lowest as of Q1 versus -- the lowest that they have been since 2016 at $893 million. Our fixed cash commitments also have come down, forecasted a little over $100 million for the year. As we have -- as we bought back the $55 million of our senior secured notes as well as interest rates decreasing, we have lowered our weighted average cost of debt capital by about 70 basis points, which decreases the amount of interest that we owe for the year as well as we are taking advantage of opportunities within the CARES Act to defer our pension contributions for the year. So that's driving the cash commitments down for 2020 versus prior years. And you can see that we continue to increase our book value of equity over time as well. So I'll turn it back over to Eddie for Slide 10.

Thanks, Molly. So as we move to Slide 10 and we look at Central Steel & Wire, which is a company we bought on [Audio Gap] of 1998 (sic) [ 2018 ], and so we're coming up on the 2-year anniversary of that acquisition. Certainly, we had the benefit of the second half of 2018, but then in 2019, carbon got whacked. And so carbon went from $950 a ton in 2019 -- or really in 2018 and all the way down into the $400s on a CRU basis in 2019. And so that caused significant margin compression at Central. But the thesis is intact. And so when we looked at the overall strategy that we were going to put into the restructuring of Central Steel & Wire, we knew we had a good brand and a good franchise, especially around long products, tube products and strip mill plate products, which is a great fit inside of Ryerson's portfolio. We also understood that we had less customer overlap than we anticipated even as we went through due diligence in that acquisition, but we also knew that we had a company that had not generated any net EBITDA in 10 years. And so clearly, the systems were antiquated, the business processes were antiquated, if even existent. And we had a lot of work to do there, but we've had a lot of practice at that. We're very good at that. So we rationalized, we stabilized and optimized, and we started to work towards getting Central onto our ERP platform, which is in progress now. We took a lot of costs out. We've taken 20% of cost out. We've taken over $100 million of working capital out. We sold noncore assets. And so really, we're at a point now at Central where, in March, Central -- as carbon just started to normalize around even a level that was well below carbon sheets long-term 10-year average price, in March, Central really put up a good print for what business conditions were just before we went into the COVID cataclysm. Central really flashed the really important data points, so we can see the significance of the work that's been done there when we had a month that looked relatively normal, even though it didn't last because we all know what type of environment we're in now. But having said that, the central thesis looks really good to us, and we continue to march toward getting those costs out, building the operating leverage, accentuating the brand around long products, tube and strip mill plate while continuing to support the sheet business. But of course, we have a lot more options around our network when it comes to where we produce that sheet and how we produce that sheet and who we do it for. So we think we're really on target for getting to that $600 million revenue run rate and normalized EBITDA of $50 million adjusted and excluding LIFO of $50 million. And we think, again, that looks like an industry midpoint-type level. And of course, we're far, far away from that right now. But when you see through that and look through that, the benefits of the deal are clear that as we take out working capital and we sell noncore assets, we wind up with a very small investment. So if we back that out of the $168 million that we paid for Central, which was at 65% of book and we look at how we restructured the working capital that they need to operate the business, we look at non-core assets that we've been able to sell, we have a very low basis of investment going forward with a very good franchise that we can generate significant EBITDA through and generate operating leverage and earnings growth for Ryerson moving forward. So very pleased with the work the team there has done, but recognizing the difficulty even today in the current environment within which we're operating. So moving to Slide 11 and looking at the really unprecedented 2020 environment. We look at what are -- what factors are supporting growth right now. So low imports, inventory replenishment, fiscal stimulus, the supply-side response was very quick this time, which was different than '15 and '16 and '08, '09. Reshoring, we can't really call it a bonafide, I would say, material trend yet, but there are signals and there are data points that are more promising in terms of manufacturing coming back to the U.S. Look -- supply chains looking to derisk maybe in ways that they weren't looking to derisk between 2001 and 2017 and certainly more manufacturing coming back to North America. And then there's the YITTBB movement, which is a recognition that we really need to build. We need to modernize. We need to really invest in infrastructure. Certainly, when you look at what our COVID preparedness was and how the country had to mobilize to manufacture hospital beds, ventilators, medical instrumentation, respirators and masks, I think there's a recognition that we need to be able to mount a response much quicker than this, and we need to build and we need to modernize our infrastructure where the investment returns on the dollar of infrastructure have about a 1 point for a multiplier, which is about as good as anything you can get in the economy. But for some reason, we just have not invested at the rate of GDP. We've underinvested in infrastructure as a percentage of GDP relative to the last 50 or 60 years. It's not clear why we've done that. But clearly, I think people are developing a recognition that cannot and should not continue. When we look at the uncertainties moving forward, we can see that there's asynchronous virus uncertainty. So we really don't know how each area of the country and how each country in the world -- we know it's going to be asynchronous, and we don't know how that uncertainty is going to play out in terms of economies being able to recover and people being at health, both mentally and physically, to really contribute to economic growth. So we still think that's an asynchronous event as we move forward. We don't know how much continued fiscal and monetary stimulus there's going to be. Certainly, the Fed is signaling that there's going to be overwhelmingly strong support that we have to see what the U.S. Congress and what the executive branch do in continuing to bring fiscal stimulus and a catalyst for demand back into the marketplace. The working capital flywheel is extremely important. We've always said the biggest risk in the pandemic, given the acute nature of it and the suddenness of it, was making sure that, that working capital flywheel continues to spin. Receivables keep coming in, customers pay, we pay, everybody pays their bills. And we can keep that flywheel spinning without it getting jammed up and coming apart. Labor market dislocations and unemployment. Certainly, we went from 3.5% unemployment to 20% unemployment. And so we really have to see how those dislocations are going to play out over time as demand comes back and at the rate at which it comes back. And then there's business investment confidence. I mean how are businesses going to spend? And how are they going to invest moving forward? And how quickly can that come back? And then, of course, there's consumer confidence. How are consumers going to spend their money? What are they going to spend it on? And how much do they really have to spend, certainly after the initial burst of stimulus wears off? And then there's risks going forward, which we've really seen play out to a really prolific degree in terms of political risk, societal risk, global trade tensions and debt levels. So when we look at Ryerson, we bring this all back to Ryerson, and we say, okay, what are our strategic priorities for getting to our next phase targets? We're going to continue to actively explore opportunities to refinance our 2022 notes, but we're going to do that opportunistically because we're still 23 months out from our maturity date. And we've certainly seen high-yield debt markets recover. We're going to reduce our net leverage. We're going to gain profitable market share, increase the value-add as a percentage of sales. We're going to continue to do more to the metal to generate that value-add, and we're going to continue to work on that speed quotient because that's a value-added parameter that can clearly be developed to a greater degree. And then we're going to achieve the Central Steel & Wire long-term -- our long-term and mid-cycle targets for CS&W, which leads to over the long term, which has been extended because of COVID and other reasons. But we get to 6% U.S. market share. We look to get to a 2x net debt to adjusted EBITDA leverage ratio. We get to $600 million in revenue and $50 million at CS&W at mid-cycle conditions. We get to that 15% of value-added mix from about 10 point, call it, 10.7%. And we start to see intrinsic gross margin levels, excluding LIFO of 20%. And so with that, we'd love to take your questions.

Thanks, Eddie, and thanks, Molly, for the presentation. Really appreciate it. I'll kick off with a couple. I think just in terms of the overall environment, I was wondering if you could just flesh out a little bit more details in terms of the severity of what you saw. I think in the 1Q update, you talked around North American shipments being down, I think, about 25%. In Mexico, more than that versus pre-pandemic levels. Can you comment at all about May? Or how you've seen the comeback from that point at this stage?

Sure, Chris. Right now, what we're seeing is we're seeing it improve incrementally, but it's slow. But it is improving incrementally. So off of those initial, call it, demand shock levels, we're seeing it pick up incrementally, but there's still a lot of oscillations in that. You still got customers that are starting up with very intermittent backlogs. There's still sort of upsets among labor where there were supply -- well, labor and components. So in some cases, we have customers that weren't able to get components from overseas. They weren't be able -- they weren't able to get components from Mexico. And I think those events have been reported on to a significant degree. But then I think there's also been continued labor dislocations, getting people back to work, the number of people that can get back to work for reasons attributed to their health, their willingness to come back to work and there being consistent backlog for them to work through. So incrementally, it's getting better. But I think we need more time to see that trend. Hopefully, that trend continue and grow out. I mean we're just coming through a period over the last several weeks of protests, where there have been certain business interruptions have occurred due to the protests that are taking place across the country. So I think if we can get through this period, we should see more discernible trends develop that we hope will continue this incremental climb back to at least toward pre-COVID demand levels.

Thanks, Eddie. And you talked about that broad sectors, but I just wondered on non-res construction specifically, that's been an area -- it's been a topical debate, I guess, in the last few weeks, in particular, with some of the leading indicators, ABI, Dodge Momentum, et cetera, starting to come down quite a lot. So it's sort of a battle between the longer-term infrastructure build, some of the spending you talked about with below-GDP investment in this sector versus sort of the near term where some of the backlog might be changing. I just wondered if you could comment on how you're seeing that for the course of 2020 with any visibility you have.

Yes, sure. I mean, we did see this in '08 and '09 and 2010. And we saw it in '15 and '16 to a degree, and that is -- construction tends to be a lagging indicator. So you have numbers that come in, and it's based on projects that are already in the pipeline or projects that are completing, and they're still drawing metal through the value chain. So I think it's fair to say there's going to be a pause, and there's going to be a pause for a number of reasons, all related to factors that we're well aware of. So there'll be a pause, meaning the overall level of construction is going to come down. I do think that there's a certain level of construction that will maintain, so we can argue whether it's whether 90% of pre-COVID or 85%. But we're seeing construction activity, but it's -- we need more time to establish the degree of the pause, the magnitude of the pause and that transition from projects that tail out to projects that get permitted, projects that get approved, money that flows into -- to fund those projects across the different areas of non-res as to whether it's governmental, which we would expect to be weak for a period of time. Certainly, you're not going to see construction in certain areas of the economy. I can't imagine there's going to be a lot of retail space built. And what you may see, though, and what we're starting to see some preliminary indications of, are thoughts around repurposing of real estate and highest and best use analysis of real estate. And do you convert certain properties for residential use? Moving forward, do you convert space to a higher and better use? You convert more and more space to support the e-commerce build-out, for example, which is a long-term secular build-out trend that is continuing to gain strength. So I think the overall net -- sum of all that is construction's down. But I don't think it's down at the level of the overall economy. So if the overall industrial economy was down 30%, and it's coming back towards 20%, then maybe construction's down 10%, is my best guess right now.

Okay. Great. And then I wondered if you could then just talk through some of the other increased demand areas you've seen in healthcare equipment, packaging, things like that, particularly related to the stainless division. So just some areas, I guess, of -- that have helped your business. And then maybe just comment on any other bright spots or surprise areas where there's actually been demand as a result of the COVID situation.

Yes. I mean, I would say anything levered to the pandemic response really, as you would imagine, jumped noticeably and significantly, certainly in -- by the end of March through April and the middle of May. Even though that's dialed back a little bit, it's still on balance, it's still strong, and people are still building PP&E stockpiles. And some people are still noticing shortages in PP&E or critical medical response capacity. Even though you look at the number of beds that are filled, you haven't seen that surge capacity needed in a while, but you still see an overall anxiety for people to make sure that they have the overall right amount to handle a potential surge or response and even preparing for a potential wave 2 in the fall. So the COVID response part of our business, which, call it, 15% continues to do very well. There are certain secular themes that, again, are doing very well. So material handling equipment, automation, anything to do with e-commerce build-out, anything to do with cloud computing, anything to do with network infrastructure, electrical network infrastructure, is still doing very, very well. We see defense as stable, as solid. And then you get into end markets that are starting to reflect how people are spending their money or the money they do have to spend, how are they expressing that. So they're not taking planes and they're not going to Europe. Maybe they're running a camper or they're running an RV or they're playing golf, but there aren't really caddies available or not permitted to be on the course. And so it's 1 player to a golf cart. So you're starting to see certain recreational vehicle markets start to recover, whether it be pontoon boats, golf carts, certain utility vehicles, campers and home fitness equipment. So those would tend to be sub-verticals. But there are things that are still weak. Transportation is still weak. Energy is still weak. And certainly, things like foodservice equipment is still weak, even though you're starting to see a reorientation of foodservice more towards central commissaries and central kitchens that are delivering meals or prepared foods that fit with certain lifestyles, for example, because we know that food delivery has picked up, curbside delivery has picked up. So you're starting to see monies reorient themselves into those things, but it's not making up for the overall shortfall in demand right now.

Thanks so much, Eddie. Appreciate that. We just got a couple of minutes left. I might jump across to Molly, just a couple of items on cash flow, balance sheet management. Some interest on the current structure of the bonds and potential for any changes, repurchases, et cetera, over the coming years. And then also, can you could just elaborate a little bit further on the working capital opportunities? How things are going, tracking to plan, et cetera? I know you mentioned that briefly in your prepared remarks, but just wondering if you could flush out the working capital. It's always hard to read with so many moving parts at the moment.

Yes, sure.

Molly, do you want to give a shot?

Sure. Yes. As far as the bond itself, we did repurchase the $55 million in the quarter. And we're always looking at opportunities that may present themselves. The bonds are currently trading around their par value, so we really wouldn't take advantage at that point. But we're always going to look at opportunities for potential refinancing of the bonds. Right now, we don't really see -- we could refinance the bonds right now, but the coupon that's available to ourselves at this point is probably not at the point where we think that the credit that avails Ryerson, it's not -- it's at a too high of a coupon that we're willing to address it. So we're going to continue to look at the market and wait for the opportunity to avail itself. Eddie, do you want to address the working capital piece?

Sure. And when it comes to working capital, I mean, we set post-COVID targets, and I'm happy to say that we've done a really good job managing working capital in a very, very difficult environment. And so we've exceeded where we thought we would be by this point in the quarter, and we expect to keep going and getting to our target. And we -- I think we mentioned that we thought we would end the year within a plus or minus 10% levels of where Q1 liquidity was booked or printed. And so we still think that's where we end up. So without another exogenous event or without another shock, as we look out over the balance of the year, we're confident that we hit all of our marks.

Great. That's very clear. That's just coming up to the 35-minute mark that we've been allocated, so we might call it there. But I'd like to thank Eddie and Molly very much on behalf of Deutsche Bank. And thanks, everybody, for listening in. The company has some further one-on-ones, and I'm sure, as available, if you have follow-up questions, either let myself know or the company directly. Thanks again, everyone, for listening in, and thanks, Eddie, thanks, Molly.

It's our pleasure. Hey, thanks. Take care everybody. Stay well.

Thank you, everyone.