Ryerson Holding Corporation (RYZ) Earnings Call Transcript & Summary

Yes, hi. Good day, everyone. Thank you for joining Deutsche Bank's Global Basic Material Conference. I'm pleased to have with us Ryerson. We have with us the CFO, Jim Claussen; and the Controller and CAO, Molly Kannan. The format today will be hybrid. There'll be a short presentation followed by a Q&A. I would like to remind everyone to please type in your questions in the Q&A box on your left-hand side of the screen. So I'll hand over this -- hand over to Jim for his presentation.

Thank you, Sathish, and good day, everyone. As Sathish mentioned, I'm Jim Claussen, Chief Financial Officer of Ryerson, and I'm joined today by Molly Kannan, our Controller and Chief Accounting Officer. Starting off with a quick snapshot of Ryerson. Ryerson's intelligently interconnected network of service centers throughout North America, really focused on providing exceptional customer experiences to our nearly 40,000 customers. We sell a wide array of products, have done so for 179 years under the Ryerson brand in North America. From a trailing 12-month perspective, Ryerson is a $3.6 billion company, with $209 million of adjusted EBITDA, excluding LIFO. As we look at performance since Ryerson went public in 2014, we have increased market share and reduced -- significantly reduced our net debt. From a product portfolio standpoint, Ryerson offers about 75,000 products. And our commodity mix, as you look across the main commodities we offer, we're about 52% carbon products, with the remaining 48% coming from non-ferrous products, either stainless steel or aluminum. Where does -- where do we fit in the industry? As I mentioned, Ryerson is a service center. We are not a producing mill. We effectively quickly at scale provide value-added services and products to our network of customers through our digitally connected network. We leverage this network to service those customers through our strategic locations across North America, efficiently, quickly, helping them shorten their supply chains, keep their inventories at a reduced level, help to manage their risk. And as we are designed, we are countercyclical when it comes to cash flows. So in up cycles, we drive cash flows through earnings. And in down cycles, we drive cash flow off the balance sheet. Looking at key investment highlights for Ryerson, we continue to improve our operating and our financial profile, providing shareholder value through our operating model, execution and our balance sheet transformation. We continue to position ourselves through our investments in both digitization our culture, our brand, our network, our analytics, to be well positioned for cyclical growth trends and secular growth trends. We have a strong management team that is with long-standing careers in the industry. From an operating model standpoint, we're focused on the customer. Focused on great customer experiences every time they engage with Ryerson. Whether it's through the phone, whether it's through our 24/7 website access, how ever the customer chooses to engage us, Ryerson is ready to provide speed and scale and service to help them grow their business. As we look at the 3 pillars of our performance, it's really operating efficiency, which is leveraging our analytics, our speed, our talent management to have best-in-class expense and working capital leadership. It's margin expansion, whether that's through value-added services, innovation and supply chain mapping or continued growth in our product and customer mix and growing profitably, whether organically or inorganically. We're investing in capabilities that we can leverage across our entire network in our highly fragmented industry.

Thanks, Jim. So we wanted to highlight our first quarter 2021 financial performance. We did continue to see continued recovery coming through the pandemic, out of the pandemic, with revenues being up 14% from Q1 2020 levels, really being driven by average selling price inflation that we're seeing in the industry. Average selling prices for Ryerson was up 18% year-over-year. Volume was down about 4%. So we're still working our way back up to pre-COVID levels. But still, overall strong performance. Sequentially, also saw a really strong improvement with revenues being up 35% from Q4. Gross margins, excluding LIFO, were up significantly from both periods from Q1 and Q4, up to 24.6%. And we continue to manage our working capital really well with our cash conversion cycle being at 53 days. That was down 24 days from the Q1 2020 period and down 9 days from Q4 of 2020. Our net debt leverage ratio, when you compare it to the trailing 12 months of adjusted EBITDA, was at 3.3x. So we're getting pretty close to our long-term strategic targets that we set for ourselves at 2x, which Jim will talk about in a little while. But a significant improvement and really being driven by both net debt reduction that Jim just mentioned as well as a strong adjusted EBITDA, excluding LIFO generation, we had $124 million that we generated in the first quarter, which exceeded the full year of 2020 results, which is $120 million for the full year. So we also guided to the Street earlier in May of Q2 guidance of between $131 million and $135 million for Q2. So that guidance we had given before is showing a stronger quarter than Q1. Total liquidity also very strong, up over $200 million in Q1 versus Q4. And on the bottom right, that book value of equity and our IPO in 2014, we were in negative equity territory. And with all the improvements that we've been making in our operating model and balance sheet transformation, we're clearly in positive equity territory ever since 2018. And here's really the -- even more demonstrating that, that balance sheet transformation. So our net debt is down below $700 million. As of the first quarter, that's down 40% where it was at the time of our IPO in 2014. Our pension benefit liability is also down about 50%, down over $140 million from that time frame. And as a result, our annual fixed cash commitments have come down over 50% and are less than $100 million per year, which just gives us more power to continue to invest in the business as well as use free cash flow to continue to delever the business. And speaking to free cash flow. So this next slide just shows our free cash flow generation over the -- from 2008 forward, and we've generated $1.2 billion of free cash flow during that time frame. Jim talked about how we're a countercyclical cash generator. So in periods of down periods, we generate a lot of cash. And in up cycles, that's tending when you invest in your working capital, have more of a cash burn, but you can see in this chart, in the up periods of 2014, 2018 that we really did mitigate that burn rate. And in 2018, we were actually positive as we continue to really maximize how we're managing our working capital levels. We're also really well positioned for the industrial metal sector recovery. A lot of people probably know about the commodity inflation environment that we're seeing with carbon prices at all-time highs. Nickel and aluminum prices have also seen steady improvements. And then the chart on the right, you can see that we've seen negative territory in the U.S. industrial production metrics but are seeing positive numbers over the last couple of months. We're seeing demand recovering in nearly all of our end markets with really oil and gas being the one exception. We still are seeing really low inventories overall in the supply chain, which really means that we're setting ourselves up for restocking cycle. Lead times are continuing to be extended and continue to extend further. And we are seeing definite trends on onshoring with customers having a strong preference for a domestic supply chain. We've all seen what this pandemic has really brought the challenges in supply chain, especially with bringing things overseas and the shortages in containers and vessels. So we're definitely seeing positive trends in continued recovery in the sector. And then this slide really shows the end markets that we're exposed to. Virtually, every end market we're in with maybe the exception of automotive and aerospace. But we've been saying for a number of years now that it's really time to build. It's really well documented in the industry and overall, in the U.S., the underinvestment in infrastructure overall. And there has been discussion in the Biden administration and Congress of wanting to do an infrastructure bill, and Ryerson will definitely benefit from any kind of infrastructure investment that comes forward. But not only that, we're also really investing in secular growth trends that may be coming out from either ESG-type initiatives from electric vehicles or renewable energy as well as trends that have come out from the pandemic such as e-commerce, logistics, automation and cloud infrastructure. And with that, I'll turn it back over to Jim.

Thanks Molly. As Molly mentioned, we're really set up -- we have really set ourselves up well for this recovery through our investments over the past few years. We've spent a lot of time and energy investing in our intelligence systems. And what do I mean by that? We're connecting our people, our network, our supply chains in order to really provide a speed of service to our customers that is new and differentiated and different. We have a long history of strong backbone of operating facilities all across North America. Ryerson has been operating and helping to build America for nearly 180 years. What we have been doing recently is connecting those service centers, that network, to leverage the capabilities and offerings of all the facilities in our network to every customer no matter where they are. So keeping those supply chains mapped virtually, visually, right at the fingertips of our commercial teams, having a network of interconnected inventory which allows us to manage our working capital and then continuing to invest in strategic fixed assets that, again, we can now leverage across a wider network. That's the organic side. The inorganic side, we have completed bolt-on acquisitions since 2014. We tend to focus on processing capabilities or broadening our customer portfolio in specific areas. So looking for services, end markets, capabilities to enhance that supply chain network that we can -- that are accretive to us and that we can leverage across the wider network through our intelligent systems. Moving forward, Molly touched on this, our strategic priorities. We're going to continue to reduce our net leverage. Molly talked about our target of 2x net debt to adjusted EBITDA, excluding LIFO. We will continue to invest in our digitalization initiatives and make sure we continually look at update, optimize our footprint, continuing to make that network as efficient as possible, so we can leverage it across all of North America. We also look to increase the percentage of sales we have in value-added solutions to our customers. So we're targeting a 15% value-add mix through strategic investments, but also through organic growth. We made an acquisition in 2018 of Central Steel & Wire, and we're continuing to strive towards our long-term mid-cycle targets of revenue and more importantly, $50 million in EBITDA from that transaction. All of those initiatives combined are targeted at driving 20% gross margins, excluding LIFO. And touched on the experienced management team. This is our core group of management. Molly and I are happy to be here with you today, but I'll move on to as that's merely for reference. What are the takeaways before we move to questions? Ryerson is really a story about continuing to improve our operating and financial portfolio, really improving the balance sheet side. Since our IPO in 2014, we have positioned ourselves well for cyclical and secular growth trends. We continue to invest in initiatives to support our organic growth, but also look for opportunities, whether it's in CapEx or M&A, to add capabilities into that network to grow in that regard. Again, I'll touch on it again. We have an experienced management team, and I look forward at this time to your questions.

Yes. Yes. Thanks, Jim, and Molly. That was a great presentation. So I would like to first remind everyone to submit any questions through the Q&A box. My first question is just on -- you mentioned that record prices across many products that you're supplying. So my first question is, are you seeing any pushback from customers in terms of -- because of these higher metal prices? Just seeing any demand destruction, especially in the maybe non-risk construction side where we are hearing some projects maybe being delayed or being put on hold? Any comments on that side on any other markets that you are seeing?

Yes, Sathish. So we service a wide array of industries and talk to customers across -- with a wide breadth of end markets across North America. I think what we're seeing more on the demand side as people have ramped up is some of the supply chain constraints that have been widely publicized. Whether that's the chip shortage or whether it's getting foam or whether it's ports that are clogged, you see lead times have extended out in a lot of products. We've heard more of that from our customers on struggling ramping up than we've heard the demand destruction side at this point.

Okay. Yes, I mean, that is basically leading to my next question. So you mentioned about the supply chain issues and the extended lead times and people scrambling to get the spot tons and stuff like that. So in that context, from a medium to long-term perspective, do you think your customers are now rethinking their inventory strategy, like just-in-time or having maintaining a lean inventory? Or do you see any possible for a shift? And whether you see that as an opportunity for you to step in and manage their inventory even much more than what you do right now?

Yes. No, I appreciate the question. And really, that's where I look at the power of our interconnected network, being able to deal with supply constraints. So for us being able to keep our customers in metal when they are lean. And as we look forward, there are customers that are really concerned with making sure that they have good, stable supply lines. I do think there is a piece of our industry that is where we had some buyers that may have been very spot, and they may be rethinking that position at least for a portion of their buy. We have a lot of customers that are -- have long-standing supply where we've supplied them on a line for years. And I don't see that being reviewed on their end. But to your point, I mean, there certainly has been some challenges for folks that maybe were too lean on the inventory front, whether it's steel or whatever else it may have been.

Okay. So just on your 2Q guidance regarding your realized price. So you mentioned that probably you could see 12% to 14% improvement in realized pricing for second quarter, which is much higher than some of your peers. I think it's mainly because of your program business that you have. So can you remind us the split between the program and transaction business that you have and the lags, specifically in the carbon steel market that you see?

Yes. So first of all, we're about 52%-ish spot and about 48% on the program side. Those programs exist across all 3 of our main commodities, which would be carbon, stainless and aluminum. So I think that's a difference as well with Ryerson being in the high 40 percentages of non-ferrous materials. But on certain contracts, you certainly do see that lagging effect on any indexed program.

So in the first quarter call, I think Eddie mentioned that the pricing could remain stronger for 2Q and 3Q. And then any normalization could -- will be normal. So what gives you confidence that the normalization will be gradual because historically, given where the carbon steel prices are, usually, the correction is also as violent as it used to be. So just from a historical perspective, what has changed? And what gives you confidence that the normalization will be more gradual this time?

Yes. I think what Eddie mentioned in the call was really that we expected the pricing to stay stronger, maybe longer than people had initially thought into Q2 and Q3. Really, we follow the futures curves, we have insight into end market demand through our wide customer base. We are obviously in contact with our suppliers from that standpoint. And then as we look at -- as we take a look at inventories across the service center industry, in general, they're still at lower levels than traditional within the whole network. So I think there has not been the restocking at least across the MSCI, yet. So...

Okay. So just switching to the cost side now. So I know the pricing and shipments trends have been positive. But what are you seeing on the cost side, especially in terms of your warehousing and selling and general expenses, given the moves that we are seeing in freight, fuel and the labor costs? So anything that you can highlight on your cost side?

Yes. On the cost side, we continually work on our operating model, on our efficiencies, on continuing to improve productivity across the network and leveraging that network to a great extent. Now specifically on inflationary areas, when you take a look at delivery or trucking logistics, we have our own internal network of trucking and/or dedicated contracts for delivery. So we're a mix of that. So that has really helped us on the logistics front, be able to service our customers really well by having that dedicated network established. There are increases coming through in some other products and on a spot basis, that's really where the market is taking our costs, making sure we have our cost factored in when looking at spot transactions.

Okay. Yes, that's helpful color. So in terms of maybe switch to capital allocation, so you already touched upon it in a couple of your slides. So my question is, do you think your main priority will be to continue to pay down debt? Or do you think the current balance sheet is in a position that you can maybe look at midsize or a larger M&A, similar to what you did with CS&W.?

Yes, financial priority wise, #1, is continue to delever and get in that target range. Along the way, we continue to look for opportunities. We are a highly fragmented industry. We're very diligent in our review process of a tuck-in acquisition or an M&A investment of large scale. So we continue to review that, we have an M&A pipeline we review. But we're going to -- we continue, I would say, in a 1, 2 ordering, it's still 1, delever and then 2, M&A.

Okay. Given the current landscape, do you think your M&A pipeline is probably -- can you compare it to the pre-COVID levels? I mean, probably most -- right now, given the profitability across the sector, are you seeing any M&As in your pipeline? Or is it same versus what you had pre-COVID?

Yes. I would say the pipeline is definitely recovering. There obviously was a period during COVID when there wasn't much activity anywhere, but we're starting to see more opportunities come into the pipeline and things to look at, which we, again, as I mentioned, we put through our process. And what we're really looking for is things that enhance our offering, give us capabilities that we can leverage and provide synergies and add value to the entire organization.

Okay. In terms of your deleveraging. So I think you have mentioned about your target to reduce -- possibility to reduce debt by $150 million this year? And $100 million of that is through real estate proceeds. I think in 1Q, already did $30 million. So any time line on when you can realize the remaining $70 million in real estate proceeds?

Yes. So you mentioned the redemption feature. We can redeem up to $100 million of our 2028 indentures through real estate sales. We continue to look at our model. And if there's an opportunity there where a transaction makes sense and is supportive, we will -- we would look to execute that. And then the other side of that coin is we have 3 annual special redemption features of 10% of the initial face value that we can execute one 10% redemption each year. So that's another $50 million. And that time line is -- would be after August 1, the anniversary date of the indentures.

Okay. That's helpful. So just switching to your value-added mix. So you mentioned that your target level is having a 15% value-added processing mix. Can you remind us where you stand right now? And how much -- I mean, how much more investment would you need in terms of equipment or additional facilities that you need to make to achieve that 15% value-added mix goal?

Yes, I think we ended the year a little over 10% on the value added. And really, from an investment standpoint, that's been some through our targeted M&A historically. But it's also through a lot of this mapping of the supply chain. I think where we look at -- where I look at the ability to really leverage here on the value-add is not having to have all the capabilities that we offer everywhere, really being able to leverage our interconnected network to have those specialized services available to a wider customer base through the network. So you mentioned the Central Steel & Wire acquisition. We had talked about that a little bit. But that acquisition has now been brought into the fold from a service center network standpoint. We operate under the brand, the Central Steel & Wire brand, but the product offering that Central Steel can now offer their customers has been enhanced by Ryerson's product offering and value-added capabilities, and Ryerson's capabilities have been enhanced by Central Steel & Wire's product portfolio, which was more tube and bar than Ryerson was traditional.

So regarding CS&W, so you have this medium-term target of $600 million revenue and $50 million in EBITDA. So any time line on when you go -- I mean, where you are now versus when you could achieve that goal?

Yes. Q1, CS&W made, I believe, a little over $10 million. So certainly working our way to the targets. It's been a really good acquisition. We got a great team in place at Central Steel & Wire, managing the business. We did the systems changes on the back end. So really, now it's leveraging the brand and the commercial power of that organization and growing on the top line and bottom line.

Okay. And in terms of your view on infrastructure bill, you said that it would be positive for the company. And -- but then do you think you have the latent capacity to handle any incremental demand? Or would you need to make any other investments to cater to that incremental demand from infrastructure bill?

Yes. I mean, from an overall sense, certainly would welcome that and welcome that enhanced demand challenge. I think as we work through our model, we would initially just flex, whether it's through overtime or additional schedules and then look to add crews or shifts as needed depending on how wide-ranging and impactful the infrastructure bill would be. From a structural capacity standpoint, we're in a really good spot to handle that demand. So it would be flexing. As far as how much that would require, I think we need -- we'd really need more of what's actually in the bill and where it's going to be and what it is. But there's a lot to like about infrastructure spending. I mean there's been so many chronicled things from, whether it's the Texas power grid or whether it's bridge issues across the country that really as an industry for a long time, we've been saying it's time to build, and we certainly look forward to the opportunity to participate in that build.

Okay. And we are reaching our allotted time. I just have one more question. So just on -- just on your mixed shelf filing that you have in place? Any comments about -- I mean, given the share price at near-record levels, any plans to maybe do a secondary offering and then pay down the debt? And do you think maybe Platinum could tag along? Any comments on that front?

I think, first and foremost, the shelf filing was really a replacement of a shelf that expired at the end of 2019. We didn't replace that shelf during the pandemic. So really, the filing was just to refresh that and put that out there as a potential opportunity, as you mentioned, whether it's to further support deleveraging or whether Platinum would choose to tag on. But really, that filing was more in regards to refreshing it. And if there's an opportunity to do so, we certainly will look at it.

Okay. So I think I've reached my end of my question list. So I'll turn it over to you to make any final remarks.

No. I'd just like to say thank to you, Sathish, and thanks, everyone, for joining us today, and look forward for connecting with you in the future.

Okay. Thanks. Thanks, Jim, and thanks, Molly, for your time today. I really appreciate your time. And then maybe next year, we will meet in person in Chicago. So thanks for your support.

Certainly would welcome that.

Okay. That concludes our session. Thank you.