Ryerson Holding Corporation
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good day, and welcome to the Ryerson Holding Corporation’s First Quarter 2021 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Justine Carlson. Please go ahead, ma’am.

[Justine Carlson:]

Good morning. Thank you for joining Ryerson Holding Corporation’s first quarter 2021 earnings call. I’m here this morning with Eddie Lehner, Ryerson’s President and Chief Executive Officer; Mike Burbach, our Chief Operating Officer; Jim Claussen, our Executive Vice President and Chief Financial Officer; and Molly Kannan, our Controller and Chief Accounting Officer. John Orth, our Executive Vice President of Operations, will be joining us for Q&A.

[Eddie Lehner:]

Thank you, Justine, and thank you all for joining us this morning to discuss our first quarter 2021 results. I hope this call finds you all safe and well. I want to begin by thanking my Ryerson colleagues for making the most of our opportunities, and overcoming the many challenges engendered by the pandemic, now in its second year, as we together achieved truly outstanding results safely and productively in the first quarter of 2021. I also want to thank our customers for every opportunity to earn your business, and to our suppliers as we work through the supply side challenges posed by this very unique time in our shared history. At this point, the pandemic is still very much with us. However, vaccination efficacy data looks to be promising, indicating that better days are ahead. Whether we debate commodity and demand, regular cycles or super cycles, supply chain squeezes and their duration, fiscal and monetary policy support effects, de-carbonization, supply chain reorientation and rotations, and ongoing secular growth stories, what is clear is that the current environment of higher prices and recovery demand looks to be stronger for longer. This is evidenced clearly in channel inventories that are still well below restocking parody before even mentioning inventory levels necessary to support growth. The PMI report from this week illuminated what we’re experiencing in that demand is recovering and getting stronger, but for acknowledged shortages of various manufacturing inputs, whether it is labor, transportation, lumber, metal, semi-conductors, phones, ceilings, and you name it.

[Mike Burbach:]

Thank you, Eddie, and good morning, everyone. Returning to the commodity environment, the aggressive price increases in carbon products that began in the second half of last year, have continued to unprecedented levels as lead times remain extended, there appears to be a little give in futures pricing until possibly later in the year, or early next, depending on when new capacity becomes available in input constraints abate. Likewise, LME aluminum ended the first quarter 8.6% above the year end price, and continues to appreciate into the second quarter. LME nickel prices had, on the other hand, softened slightly by the end of the first quarter, compared to year end, but have recently turned higher again, given global stainless steel demand in emergent EV battery needs despite recent nickel map processing and refinements capacity announcements in Indonesia. At this time, we anticipate the prices across all three of our primary commodities will remain elevated throughout the second and third quarters. The supply chains recover and we expect that price mobilization will be gradual given supportive demand conditions. Expanding on the demand environment, macroeconomic indicators continue to report recovery in the first quarter. North American industry shipments, as measured by the Metal Service Center Institute, or MSEI, reported first quarter volumes only 1.2% below year ago pre-COVID levels, while U.S. Industrial production reported year-over-year growth in March after 18 months of contraction.

[Jim Claussen:]

Thank you, Mike, and good morning everyone. Building on the market dynamics that Mike discussed, although pandemic driven uncertainties persist, Ryerson is optimistic about the second quarter business and environment. At this point in the quarter, demand momentum continues to build and coupled with supply tightness port elevated pricing across all three of Ryerson’s primary commodities. Therefore, Ryerson anticipates second quarter 2021 revenues of $1.32 billion to $1.34 billion, assuming sequential average selling price growth of 12% to 14%, and shipment growth of 1% to 3%. Light bulb expense in the second quarter is expected to be in the range of $74 million to $78 million as replacement costs continue to increase relative to average inventory costs. Given these expectations adjusted EBITDA, excluding light bulb, is expected to be in the range of $131 million to $135 million, and earnings per diluted share are expected to be in the range of $0.49 to $0.60. Turning to Ryerson’s asset management in the first quarter, inventory days of supply decreased to 61 days below our normal market environment target range of 70 to 75 days, but reflective of the improving demand conditions and simultaneous industry-wide applied tightness. Lower inventory levels, along with further improvements in our receivables and payables cycles drove our cash conversion cycle to 53 days, the lowest achieved since 2007. In the first quarter, working capital investments and pension contributions drove a use of operating cash of $47.3 million. During the quarter, Ryerson was able to grow sales by an 8

[Molly Kannan:]

Thank you, Jim, and good morning. In the first quarter of 2021, Ryerson achieved revenues of $1.15 billion, which exceeds the range communicated in our first quarter guidance with average selling prices up 21.9% and volume up 10.4% from Q4 2020. First quarter revenue represents an increase of 13.6% compared to the first quarter of 2020 with average selling prices up 18.4%, and tons shipped down 4.1%. Gross margin contracted to 17.2% due to higher costs of goods sold recognition compared to 19.4% for the first quarter of 2020. Reflective of the periods rapid and steep industrial metal price increases, most notably in carbon steels, included in first quarter 2021 gross margin is LIFO expense of $83.8 million, which significantly exceeded our guidance expectations due to inventory average costs rising more than estimated. Excluding the impact of LIFO, first quarter gross margin expanded by 720 basis points from the first quarter of 2020 and sequentially from the fourth quarter of 2020 by 530 basis points to 24.6%. Net income attributable to Ryerson Holding Corporation for the first quarter was $25.3 million or $0.66 per diluted share compared to net income of $16.4 million or $0.43 per diluted share for the year ago period.

[Eddie Lehner:]

Thank you, Molly. During the NFL draft last weekend, the following was said about my beloved Cleveland Browns and I quote, "This really is about the process because over time process wins, plans win. There will be misses along the way, maybe big ones, but if you believe in smart ideas and stick to them, good things start to happen long-term. It can almost look and feel easy. Like you knew moves would happen before they happen. It’s clear two years in that Andrew Berry’s big plan for putting together the Brown’s roster is to always have a plan."

[Operator:]

And we will now take a question from Matthew Fields with Bank of America.

[Matthew Fields:]

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

[Eddie Lehner:]

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

[Matthew Fields:]

I mean we see from the import point of view, it seems like China is ramping up production, iron ores just hit another record so that they’re not holding back anything. Is the problem getting steel from other parts of the world to the U.S. not availability of steel in other parts of the world?

[Eddie Lehner:]

Matt, there’s a lot of different cross-currents right now. I mean you’ve got to put some weighting on de-carbonization efforts. Certainly China’s consuming most of – they’re pretty much consuming all of what they’re making. And they’re actually a net importer for the first time in probably, I don’t know, 13, 14 years. And so when you look around the world and you look at these asynchronous recoveries, but you look at how people are trying to ramp up capacity and where it’s going, clearly the availability of import that really is not a really recent memory going back two years, three years, four years, five years, 10 years. That availability just hasn’t been there. And that availability that is there it’s priced much higher and a longer lead time. So these things are going to take a while I think, to smooth out. And I think eventually, of course, we’ll get to some type of equilibrium or a better balance of what we’re seeing today, but it’s hard to see that happening over the next three to six months right now. I mean hard to see it based on all the indicators we have, any information we have.

[Matthew Fields:]

Everybody say, the cure for high prices is high prices, but it doesn’t – we seem to be breaking that paradigm right now.

[Eddie Lehner:]

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

[Matthew Fields:]

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

[Eddie Lehner:]

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

[Matthew Fields:]

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

[Eddie Lehner:]

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

[Matthew Fields:]

Right. I’m sorry, on the real estate front, you’ve sold $29 million of proceeds this quarter, you sold about $70 million to go?

[Eddie Lehner:]

$70 million to go on the total Board, my man.

[Matthew Fields:]

Yes. But as soon as you do it, you can announce the redemption the next day?

[Eddie Lehner:]

Yes, I’m going to go ring that bell in the town square.

[Matthew Fields:]

Perfect. Thanks a lot Eddie and good luck. Appreciate as always.

[Eddie Lehner:]

Thanks, Matt. Appreciate it. Take care.

[Operator:]

We’ll now take a question from Alan Weber with Robotti Advisors.

[Alan Weber:]

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

[Eddie Lehner:]

Hi, Alan. How are you doing?

[Alan Weber:]

Great.

[Eddie Lehner:]

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

[Alan Weber:]

Okay. That was really – but again, all things considered over time, you should be able to get some leveraging of relative volume.

[Eddie Lehner:]

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

[Alan Weber:]

Okay, great. Thank you.

[Eddie Lehner:]

Thanks, Alan. Take care.

[Operator:]

And it appears there are no further telephone questions. I’d like to turn the conference back over to Mr. Lehner for any additional or closing remarks.

[Eddie Lehner:]

Thank you. We appreciate your continued support and interest in Ryerson. Please stay safe and well. And we look forward to being with all of you again in August when we review our second quarter results. Take care.

[Operator:]

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