Ryerson Holding Corporation (NYSE:RYI) Q2 2022 Earnings Conference Call August 4, 2022 10:00 AM ET
Jorge Beristain – Vice President-Finance
Edward Lehner – President and Chief Executive Officer
Michael Burbach – Chief Operating Officer
James Claussen – Executive Vice President and Chief Financial Officer
Molly Kannan – Controller and Chief Accounting Officer
John Orth – Executive Vice President-Operations
Michael Hamilton – Vice President-Corporate Supply Chain
Conference Call Participants
Alan Weber – Robotti & Company
Philip Gibbs – KeyBanc Capital Markets
Good day, and welcome to the Ryerson Holding Corporation’s Second Quarter 2022 Conference Call. This conference is being recorded. [Operator Instructions]
At this time, I’d like to turn the conference over to Jorge Beristain, Vice President, Finance. Please go ahead, sir.
Good morning. Thank you for joining Ryerson Holding Corporation’s Second Quarter 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 Kannan, our Chief Accounting Officer and Corporate Controller. John Orth, our Executive Vice President of Operations, 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, 2021. 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 and 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 8-K 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 to discuss our second quarter 2022 results. As the second quarter of 2022 gave us yet another strange brew of challenges to surmount, I want to express my heartfelt thanks to our 4,000-plus strong Ryerson team for their hard work and dedicated effort in delivering a safe and profitable quarter characterized by many important actions and accomplishments toward an always improving Ryerson.
Although we always prefer the up cycle to the counter cycle, we found the signs and signals of a counter cycle by the middle of the second quarter that continued into July. The market environment we experienced in the second quarter was characterized by declines in metals commodity prices and decelerating demand. During this time, we noted from customers continuing to experience supply side and labor constraints. We noted another subset of customers tempering spot materials purchases amidst falling metals prices; and another set of customers that saw order rates decline during the quarter due to broader inflationary pressures and shifting consumer spending priorities for a triple whammy of countercyclical activity. These occurrences presented some resistance to our demand estimates for the quarter. Despite these challenges, Ryerson managed well through these volatile economic and industry inflections by delivering diluted earnings of $5.10 per share and adjusted diluted earnings of $5.31 per share, both all-time records for the company.
This second quarter represents an important milestone in our company’s history and our capital structure’s composition and strength.
During the second quarter, and as noted in our subsequent event disclosure, we retired the remainder of our high-yield notes, reduced net debt, lowered cash interest cost, completed our share buyback, amended and extended our asset-based credit facility, increased liquidity, increased the dividend, announced a new and larger share repurchase authorization, increased net book value and made important growth investments across our service center network in new plants, equipment and systems to further our company’s potential and enhance the customer experience. Now that’s a list of accomplishments of which we can all be proud that are worth repeating.
Over the past decade, we have used these counter cycles to good effect as higher cash flow generation through such countercyclical periods has enabled Ryerson to meaningfully improve its operating model; only now we have much preferred uses for that free cash flow as seen through increased investments in modernization and growth as well as increased returns to shareholders through dividends and share repurchases. Ryerson’s continued execution of its strategy to drive long-term profitable growth amidst positive secular drivers supporting such growth opportunities can be seen through increases in planned infrastructure and decarbonization investments underpinned by supply chain onshoring and increased demand for recyclable and sustainable industrial metals.
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. Now turning to the pricing and demand environment. Metals commodity markets experienced volatility in the second quarter of 2022 and at a global macro level. We are seeing carbon, stainless and aluminum trend lower. This has been driven by international factors, including decreasing demand from China’s COVID-related shutdowns, Russia’s invasion of Ukraine, continuing pandemic knock-on effects as well as domestic deceleration of demand due to rising interest rates as well as a slowdown in industrial purchasing activity.
Over the past three months, we saw a faster-than-anticipated reversion in nickel prices. The sharp decrease in prices impacted Ryerson’s stainless steel volumes, where our customers pivoted from building inventory in the first quarter to just-in-time buying later in the second quarter. The increase of nickel prices on the London Metal Exchange, or LME, in March, along with increases in stainless scrap, chrome and other alloys, led to a 10% sequential increase in average sell prices or ASP of our stainless steel product mix in the second quarter of 2022. The increase in stainless steel ASP was offset by an 11% sequential decline in sales volumes. Due to the previously mentioned factors as well as an increase in stainless steel imports in the quarter, which were additive to competitively priced inventory.
Carbon steels represent half of Ryerson’s sales mix and experienced a revenue decline of 3% sequentially as an approximately 1% higher quarter-over-quarter sales volume growth was offset by a 4% lower ASP. Our aluminum franchise delivered another solid result, with 2% higher volumes sold sequentially and ASP gaining 10% quarter-over-quarter.
In the second quarter of 2022, Ryerson reported net sales of $1.74 billion, which came in slightly lower than guidance, benefiting from sequentially higher ASP per ton, but impacted by weaker-than-forecasted stainless steel volumes. Ryerson’s higher ASP per ton, sequentially gaining 0.5% to $3,327 in the second quarter, was driven by favorable pricing in aluminum and stainless steel and partially offset by a decline in the price of hot-rolled coil quarter-over-quarter. The benefit in pricing was offset by lower volumes, declining 0.8% quarter-over-quarter, driven by weaker-than-expected stainless steel volumes.
With respect to Ryerson’s end markets, at a macro level, key industry indicators are showing a slowdown in growth in the second quarter of 2022. While U.S. industrial production has reported a 4.2% year-over-year increase in June, the year-over-year increases have been slowing over the past 3 months. At the same time, global metals commodity prices have trended lower in the second quarter on increased material availability, shorter lead times and slowing demand. Additionally, the U.S. Purchasing Managers Index, or PMI, while still above the growth threshold of 50, reported continued slowing growth in factory activity in July.
North American industry shipments, as measured by the Metals Service Center Institute, or MSCI, grew at a moderate 0.3% quarter-over-quarter compared to a 0.7% decline for Ryerson’s North American volumes. However, in the first half of 2022, Ryerson’s North American business performed better than the MSCI-defined North American service center industry, with Ryerson’s volumes declining 2.7% compared to an industry decline of 4.4%. Ryerson’s sequential volume shipment performance was led by an approximate 7% increase in oil and gas, a 4% increase in commercial ground transportation, and a 2% increase in metal fabrication and machine shops. Most other end markets experienced declines in volumes.
The outlook for North American manufacturing for the second half of 2022 remains cautiously optimistic. However, we expect headwinds of rising interest rates, continuation of supply chain issues as well as a slowing in demand. Our discussions with customers led us to believe that supply chain issues such as component shortages and tight labor continue. And while some backlogs remain healthy, there is evidence of customer destocking, moderating quoting activity, and smaller size spot transactional purchases.
From a pricing side, three months ago, we had expected stainless and aluminum pricing to remain favorable into the second half of 2022, reflecting an improved secular demand outlook. However, the Federal Reserve’s inflation-fighting actions plus weaker-than-expected China economic data have contributed to a sharp reversal in many commodity markets through the end of July, although we note a recent stabilization in LME aluminum and nickel prices amidst historically low exchange inventories.
With that, I’ll turn the call over to Jim for our third quarter outlook.
Thanks, Mike. Good morning, everyone. Eddie’s comments summarized how the second quarter was an important milestone in our capital structure transformation. The reconstitution of our balance sheet paves the way for us to reinvest in the business as well as providing capital returns to shareholders.
Looking forward, we acknowledge that the outlook for both volume and pricing has moderated into the second half. As such, we expect third quarter revenues to be in range of $1.45 billion to $1.55 billion, with ASP down 5% to 8% and sales volumes expected to be down 4% to 6% sequentially as customers assess the impact of the Federal Reserve tightening cycle and the typical summer seasonality kicks in.
While global metals related commodity prices have corrected, they remain above 10-year averages. And based on the most recent forward curves, we now forecast LIFO income at $35 million in the third quarter of 2022. Adjusted EBITDA for the third quarter of 2022, excluding LIFO, is expected to be in the range of $110 million to $120 million, and earnings are expected to be in the range of $2.40 to $2.60 per diluted share.
Now turning to the company’s cash flow and balance sheet. The company’s cash conversion cycle increased slightly to 78 days in the second quarter of 2022 compared to 77 days in the first quarter. Accounts payables and receivables were favorable by a cumulative $61 million, but offset by $174 million inventory build or a net working capital use of $113 million in the second quarter. We expect this to be the high mark as lower commodity prices imply a working capital release going forward.
Overall, Ryerson generated $85.5 million of operating cash in the second quarter and ended the period with $534 million of total debt and $492 million of net debt, a decrease in net debt of $14.5 million compared to the first quarter. Ryerson’s leverage ratio remained flat quarter-over-quarter at 0.5x, a record low since our IPO in 2014. The company’s available global liquidity increased to $894 million as of June 30, 2022, from $760 million as of March 31, 2022, due to the successful increase of our revolving credit facility from $1 billion to $1.3 billion during the quarter.
While the sequential net debt reduction was $14.5 million, compared to the $67.7 million of free cash flow, it is important to note that $52.4 million was returned to shareholders in the form of share repurchases and dividends during the second quarter of 2022. Additionally, during the second quarter, the company incurred $14.5 million in losses on retirement of debt related to the early high-yield bond redemption, which are nonrecurrent.
Capital expenditures were $24 million in the second quarter of 2022, compared to $18.8 million in the first quarter. We reaffirm our anticipated capital expenditures, excluding acquisitions, of up to approximately $100 million for 2022. This amount comprises both maintenance and growth projects related to digitalization initiatives and our service center modernizations in Centralia, Washington and University Park, Illinois.
During the second quarter and concurrent with our controlling shareholder secondary offering, Ryerson repurchased 1.6 million shares of our common stock. These repurchases exhausted our previous $50 million repurchase authorization 14 months ahead of expiration. The Board has approved a new 2-year $75 million share repurchase authorization, which we expect to deploy opportunistically. During the second quarter and through July, through a combination of open market purchases, a tender offer, and the exercise of a special redemption rate in July, we retired the entirety of our $237 million gaining outstanding 8.5% senior secured notes. The retirement of our high-yield debt is expected to save Ryerson over $20 million in annualized pretax interest.
Finally, on August 3, Ryerson’s Board of Directors declared a third quarter cash dividend of $0.15 per share of common stock, a sequential increase of 20% from the second quarter dividend of $0.125 per share.
With this, I’ll turn the call over to Molly to provide further detail on our second quarter financial results.
Thank you, Jim, and good morning, everyone. Ryerson generated revenue of $1.74 billion in the second quarter of 2022, and gross margin expanded by 320 basis points to 26.7%, up from 23.5% in the first quarter of 2022 as cost of goods sold reflected lower cost of carbon steel material. Included in gross margin is LIFO income of $73.8 million, a reversal from the $2.2 million LIFO expense booked in the first quarter of 2022. Excluding the LIFO impact, second quarter gross margin contracted by 110 basis points from the first quarter of 2022 to 22.5%.
In the first quarter of 2022, we discussed our election to recognize the interim effects of the LIFO inventory valuation method by projecting expected year-end inventory levels and LIFO cost and pro rata allocating that projection to interim quarters. We believe this change is preferable as it results in a better estimate of LIFO for the full year and typically creates less volatility in earnings on an interim basis. However, the second quarter is sharper, and sooner-than-expected commodity price corrections resulted in a higher-than-forecast LIFO income of $73.8 million versus our prior guidance of 0.
Net income attributable to Ryerson for the second quarter of 2022 was $196.4 million or $5.10 per diluted share, compared to $163.6 million or $4.17 per diluted share in the previous quarter. The second quarter includes a charge on the retirement of debt of $14.5 million and a $3.8 million gain on the sale of assets. Excluding these onetime items and the associated income taxes, adjusted net income attributable to Ryerson was $204.4 million or $5.31 per diluted share, compared to $167.5 million or $4.27 per diluted share for the first quarter.
In closing, Ryerson achieved adjusted EBITDA excluding LIFO of $224.2 million in the second quarter of 2022, compared to first quarter of 2022 adjusted EBITDA excluding LIFO of $250.6 million.
And with this, I’ll turn the call back to Eddie.?
Thank you, Molly. At Ryerson, our mission is to create great experiences for our customers, employees, shareholders, suppliers and communities. Our ongoing development of and investment in an intelligent network of value-added industrial metals service centers delivering industrial metal solutions with joy, speed, scale and consistency is the backbone of these efforts. 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, as you’ll experience when visiting us at ryerson.com, and why the Build Now movement at msci.org are so vital and imperative. Let’s keep advancing together.
And with that, let’s take your questions. Operator?
[Operator Instructions] And our first question today comes from Alan Weber with Robotti.
First question is, when you talk — when you look at through — when you think about the second half of the year, how much cash do you expect will be generated out of the work added changes in working capital?
Yes. We expect there to be certainly working capital release in the second half of the year. I wouldn’t give you a number. I would only tell you that past is prologue. If you go back and you look at what the working capital release has typically been, and then you apply a ratio to how our overall working capital balances have changed in this cycle versus prior ones, you can get a pretty good idea of what the cash release is going to be, but we expect to have working capital release through the balance of the year.
Okay. And then Eddie, a general question. A few years ago, in these kind of presentations, you talked about — you gave like a, I want to say a longer-term target. You talked about $350 million to $400 million of EBITDA. You gave an EBITDA margin projection. Can you talk about, given the improvement in the balance sheet today, where things stand? How you think about the company, say, 5 years out?
I’m not asking for a projection, just the thought process in terms of — again, because even the target back — from only a few years ago, you were targeting 2x leverage. And obviously, that’s not the case today. So just curious how you think about the business, the competition and like that. Because everybody, I assume, has improved balance sheets also.
Sure, sure. So look, first of all, I like the sound of that. But going back to — and I remember, we had an investor meeting several years back in New York. And we put down next-stage targets of gross margins, which we pegged at 20% of that time, market share gains of getting up to 6% of the market. We did give somewhat of a bracketed next-cycle EBITDA, I think, of $350 million, if memory serves. That was in our presentation materials. And I would say that we surpassed those metrics, those KPIs, over the last, say, 5 to 6 quarters.
But when we look at mid-cycle, when we look at through the cycle going forward, I would say that we’ve positioned ourselves very well in terms of being able to assess what I would say next-stage targets are going to be from here. We’ve got an Investor Day coming up in November, which I really hope I see you at. And at that time, at that Investor Day, I think we’ll be in a much better position to share what those next-stage targets are going to be. But so far, mission accomplished.
Okay. And could you just talk about as you think about — besides the recycling of metals, how you think about the industry, the improvement, and how you expect to think about market share over the next few years, excluding any acquisitions?
Yes. I think that — first of all, I’m very — on a secular medium-term to longer-term basis, I mean, we always have these cycles and counter-cycles. And the world is certainly a very interesting place at present. But I will tell you, the long-term future of industrial metals, we’re very optimistic and bullish about that future. When you look at — now I’ve said this before, Alan, people can make all kinds of decisions in the short term. They can defer spending. They can go without, do without. But I think what’s been demonstrated, if you look at — well, how do you how do you solve for the productivity riddle? A big part of that’s got to be fixed asset investment to automate, modernize and engender higher productivity rates. So you’ve got the productivity side of it that is going to include industrial metals, certainly because of their sustainability and recyclability attributes.
If you talk about transition metals and how do you build structures and how do you build electrification infrastructure, how do you improve public health, you come back to industrial metals to make those investments and to get those kind of outcomes. So very bullish where that’s concerned.
In terms of the M&A environment and consolidation, there’ll be more consolidation in our industry. I mean, we hear from more owners through our M&A work and through our business development pipeline, we hear from more owners that they’d like to do more business development, if not retire, and that they really don’t want to handle the, I’d say, the back-office functions that can really be done at scale as part of a bigger enterprise. So as we move through this counter-cycle, very optimistic and very bullish about our industry and the products that we distribute and that we add value to.
[Operator Instructions] And we’ll hear next from Phil Gibbs with KeyBanc Capital Markets.
A question on just general inflation within the business. Obviously, metals prices are what they are, but just trying to think about the conversion cost side of things and whether things like people, packaging, energy, transportation, whether you’re starting to see that level out. I don’t think you were last quarter. But curious what you’re seeing just in terms of those pressures.
Sure. So where I would say — I’d say between the second half of 2020 through, I’d say, the first half of 2021, as you know, Phil, the prices of metals really, I would say, went higher and went ahead of, I’d say, broad-based inflationary pressures and general economic inflationary pressures. I would say now we’re seeing the tail end of those pressures come into our P&L in various line items of our general ledger.
I’m going to let other members of the team give you a little more illumination around that. But certainly, we’re seeing what I would say is — I feel like it’s that last third of kind of that inflationary whiplash, where you’re going to see folks continue to price higher because they have some pricing power and maybe they got off to a slower start trying to push those price increases to the market on the OpEx side.
Certainly, we know that there’s been pressures on the labor side, but it feels like we’re 2/3 of the way through it. And I think we’re in that last 1/3 of where you start to see cost increases, but they start to level off, they peak, and then we’ll see some of those costs peel off. And I do think there’s a higher embedded level of cost, I mean, throughout, whether it’s in materials, whether it’s going to be in the OpEx ledger. There’s a higher embedded level of cost, but certainly, the rate of change and the rate of increase on those expenses will start to come down. I feel like kind of we’re in the last third of this inflationary period.
But let me — I’m going to have John Orth, our EVP of Operations, talk to you about what he’s seen on the OpEx side of the business.
There has definitely been inflation on the OpEx side of the business, and it’s moved into our operating expenses. However, we’ve managed to maintain expense leverage on a percentage basis. And the areas where we see the highest impact of inflation are in delivery, primarily driven by fuel costs and surcharges along, to a smaller extent, contract resets. And as you mentioned, packaging, supplies, those have inflated quite a bit from Q1. However, we are seeing that rate of increase begin to slow down substantially.
At the end of the day, the key for us is using the tools in our toolbox, the Ryerson production system, to identify the best practices and share those across the network to make sure that we are reusing and reducing and being as safe and productive as possible.
And then, Eddie, just on the pricing viewpoint for the third quarter, what are the biggest — what’s influencing that the most? Is it the nonferrous side and the ferrous side is a little bit more stable? Or is it a little bit of everything? Because I know you have some contracts in there, too.
Yes, absolutely. And I’m going to ask Mike to give you some more color on that in just a minute. But as an overview, we saw significant net downs in nonferrous probably from, let’s say, early May through mid-July, but now we’ve seen some stabilization around nickel prices. I mean the direction is down, but we’ve seen some stabilization in aluminum, in stainless after some pretty significant drops.
And you and I have been talking for a decade now, if not more. So we know what that invites. We know that starts to feel and look like a counter-cycle. We don’t know what the duration is or what the intensity is going to be, but we’ve used counter-cycles to really good effect in the past.
So I think in stainless and aluminum, it looks like it’s trying to consolidate around a base now with maybe some fluctuation in other elements like chrome, certainly in nickel, but it looks like it’s starting to congeal around maybe a range.
And then carbon, carbon right now, the futures indexes are showing  for the remainder of the year, not far off now. [indiscernible]. Could it drop a little bit more with some capacity introductions as we move through the balance of the year? Yes, it could. But I also think that there’s just that higher embedded level of cost in those material cost curves.
I mean if you look at aluminum, just going back on that a second, you’ve got a lot of aluminum smelters that are claiming that they’re really into their cash curves at this point, not their GAAP accounting curves, but in their cash curves. But going back to carbon, we’ll see some capacity coming to the marketplace. But I also don’t think we’re going to see a return to the 10-year averages that were in place before the pandemic. But I’ll have Mike comment on prices, and even Mike can have a little bit more say about what the supply chain is doing.
Phil, this is Mike Burbach. So I think Eddie hit it pretty good with his comments and thoughts about where we are today. I don’t have a lot to add to that other than trying to predict what’s going to happen on commodities, has proven to be a foolish exercise at times. 90 days ago when we were talking, the outlook was considerably different than it is today. We’ve seen a significant roller coaster on virtually everything we sell from late March into the early Q2 that gave us a headache, thinking things might be heading one way and then quickly reverted back to where we are today. And so what we see in here is exactly what Eddie just described, the futures curves, what we’re hearing from our suppliers, and what we think is the activity levels are going to be. I think we’re settling into something that’s a little more stable, but it was a rather interesting path to get here from early Q2 until now. And Mike, I don’t know if you have any extra comments.
Yes, we’ve got Mike Hamilton with us. He’s our VP of Supply Chain, and he’s really in touch with all of our suppliers on a really regular basis. So Mike, maybe you got some comments.
Sure. Thanks, Eddie. I think the only addition I would make is that the additional capacity in carbon is a layer-this-year phenomenon. We’ve started to see some of that, and we’ll see how that plays out with the price. On nonferrous, capacity additions are a 2023 and beyond scenario here in North America. So it’s far too early to predict what that influence is going to be when we look at where prices are.
And so I would say it feels like two or three quarters to really see average cost kind of meet up with replacement costs again, and we’ll get a good margin reset. And that will be a really good time to take a look at where we go from there. But I do think where we’re going to bottom out is going to be above where the 10-year averages were before the pandemic.
Yes, all that makes sense, Eddie, in terms of the pricing commentary. As just the company, as Ryerson Enterprise, how are you thinking about this countercyclical period differently than you were the last couple of times. And certainly, you can breathe a heck of a lot easier this time; materially easier. So — but just as a company, this time around, what are the big differences in mentality?
Yes. I mean I’ll say I’m not heartbroken about not having to go into the high-yield markets again. So certainly, I’m not despondent about that. I mean we’re obviously in a much better position now.
When we look at — we certainly have to include our results in the last couple of years into our EBITDA generation over the last 10 years. But looking at the investments that we’ve made in the company, in systems and equipment, even in new facilities like in Centralia and University Park, we’ve got some more plans on the board where that’s concerned.
When we look at our ability now to take that free cash flow, repurpose that to shareholder returns, but also to repurpose it to growth, and I mean smart allocation of capital. Sometimes you can get ahead of yourself when you do that because you’ve got to match up that capital allocation to growth to your organization’s ability to deploy that capital at the desired rate of return.
But we’ve got a good M&A pipeline. We’ve got a really good business development function. Our PMO office is really working through some projects that we really think are going to improve the customer experience and give us better expense leverage as we start to prepare for the next up cycle. So obviously, it’s a much different mindset if you don’t have to go back into the high-yield markets, you don’t have to roll over debt, you’re not paying for the past, you’re not paying creditors the lion’s share of your free cash flow.
So it’s certainly a different counter-cycle for us. And I thought that we managed through the prior counter-cycles extraordinarily well. But certainly now, we have a much better opportunity to invest in the future of Ryerson, which I think is going to pay a lot of dividends figuratively and literally.
Looks like the queue has cleared out. So we thank you for your continued support. Bob and interest in Ryerson. Stay safe and well, and we look forward to being with you all again in November when we review our third quarter results. Take care.
And this does conclude today’s conference. Thank you all for your participation. You may now disconnect.