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Edited Transcript of RYI earnings conference call or presentation 30-Oct-19 2:00pm GMT

Q3 2019 Ryerson Holding Corp Earnings Call

CHICAGO Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Ryerson Holding Corp earnings conference call or presentation Wednesday, October 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward J. Lehner

Ryerson Holding Corporation - President & CEO

* Erich S. Schnaufer

Ryerson Holding Corporation - CFO

* Jim Claussen

Ryerson Holding Corporation - President of Central Steel & Wire

* Justine Carlson; Senior Financial Analyst

* Kevin D. Richardson

Ryerson Holding Corporation - President of South-East Region

* Michael J. Burbach

Ryerson Holding Corporation - President of North-West Region

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Conference Call Participants

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* Christopher Michael Terry

Deutsche Bank AG, Research Division - Research Analyst

* Joel Gifford Tiss

BMO Capital Markets Equity Research - MD & Senior Research Analyst

* Martin John Englert

Jefferies LLC, Research Division - Equity Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Philip Ross Gibbs

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Sean-M Wondrack

Deutsche Bank AG, Research Division - VP & Senior Credit Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, my name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to Ryerson's Third Quarter 2019 Earnings Webcast and Conference Call. (Operator Instructions)

Ms. Justine Carlson, you may begin your conference.

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Justine Carlson; Senior Financial Analyst, [2]

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Good morning. Thank you for joining Ryerson Holding Corporation's third quarter 2019 earnings call. I'm here this morning with Eddie Lehner, Ryerson's President and Chief Executive Officer and our Chief Financial Officer, Erich Schnaufer. Kevin Richardson, Mike Burbach and Jim Claussen, our North American Regional Presidents, will be joining us for Q&A.

Before we get started, let me remind you that certain comments we make on this call contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those implied by the forward-looking statements. Such risks and uncertainties include, but are not limited to, those set forth under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made and are not guarantees of future performance.

In addition, our remarks today refer to several non-GAAP financial measures that are intended to supplement, but not substitute, for the most directly comparable GAAP measures. A reconciliation of the non-GAAP financial measures discussed on today's call to the most directly comparable GAAP measures is provided on our third quarter 2019 earnings release, filed on Form 8-K, which is available on the Investor Relations section of our website.

I'll now turn the call over to Eddie.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [3]

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Thank you, Justine, and thank you all for joining us this morning.

I want to thank our customers for the opportunity to earn your business, which we never take for granted. I also want to thank my Ryerson and Central Steel & Wire or CS&W teammates across our network for their efforts in continuing to make Ryerson a better organization as we move through this countercyclical deflationary cycle.

In a few words, we are in the fifth consecutive quarter of declining CRU hot-rolled coil sheet or CRU HRC prices. We have now surpassed a delta of $400 per ton peak to current trough CRU HRC prices during the past 15 months. CRU HRC prices have declined 34% year-over-year or $294 per ton. In fact, acute price deflation across all categories of carbon steel has been prevalent over the past 5 quarters, exacerbated by ineffective attempts at mill price increases in the second and third quarters that increased and extended the magnitude and duration of margin pressure.

Domestic prices have now approached levels, whereby domestic to international spreads favor domestic sourcing and scrap price declines appear to be abating with mill lead times stabilizing. If we look objectively at year-over-year industry data, we find industry shipments contracted approximately 7% against relatively high inventory stocking levels. Consequently, the outfall of such factors is not surprising and resembles industry conditions experienced during 2015 and 2016, but of lesser magnitude so far.

We highlight these points for several reasons. Despite the resulting gross margin compression, the impact is transient. And beneath the surface, we're building more operating leverage in our business as we expect to inflect back to improving industry fundamentals, and Ryerson's financial and operating condition is much stronger than it was 4 years ago.

Ryerson realized same-store industry market share growth, same-store expense leverage, net working capital management within our expectations, solid countercyclical cash flows, reduced leverage and increased net book value of equity in the quarter. Some quarters we grinded out, while our strategic investments in CapEx, acquisitions and our digitalization initiatives begin generating expected returns.

Even when the clock runs out on the quarter, we continue advancing on the longer game at Ryerson as our operating model continues its demonstrated progress toward improved financial performance over the cycle.

Since the last industry counter cycle in 2015, Ryerson has increased its net book value of equity by approximately $282 million or approximately $7.43 per share.

With respect to CS&W, we always understood this acquisition was going to be a heavy lift and shift turnaround, but also very worthwhile. CS&W has a strong industry brand with customer goodwill, but an operating model requiring modernization. At CS&W, with a product mix that is 85% carbon steel, industry conditions over the past 5 quarters, marked by acute carbon steel deflation, created significant transient margin compression. As we expect, the average cost and inventory to move below replacement cost during the next several quarters, we also expect CS&W performance to recover meaningfully within a vastly improved long-term operating model.

Turning to the current economic environment, CRU carbon hot rolled prices have declined to 2016 levels, down by more than 30% in October compared to the beginning of the year. LME aluminum prices have fallen to 2-year lows and have come under further pressure due to weak demand and falling aluminum prices.

Stainless prices have received support from surging nickel prices, which rose more than 40% in the third quarter before giving back some gains over the past several weeks.

From a demand perspective, the industrial environment softened in third quarter, with September U.S. industrial production decreasing compared to the same level last year for the first time since November of 2016. Weakened conditions were also observed in the September PMI reading of 47.8, which indicates manufacturing contraction.

North American service center tons shipped continue to contract in the third quarter of 2019 compared to the prior year, evidenced by a 6.6% decline in shipments as measured by the MSCI. At the same time, Ryerson's North American same-store tons shipped, excluding Central Steel & Wire, were up 0.5%, exhibiting better-than-industry performance and market share gains amidst the aforementioned industry challenges.

Turning more specifically to Ryerson's end markets, HVAC, commercial ground transportation and metal fabrication and machine shops were the strongest performing sectors with volume growth in the first 9 months of 2019 on a same-store year-over-year basis, supported by nonresidential construction activity and Class 8 truck sales.

Ryerson experienced lower shipments on a same-store basis in several end markets, most notably the oil and gas and food and agricultural equipment sectors as U.S. crude oil rig counts have steadily declined since the start of the year, and the agricultural industry has been negatively impacted by global trade frictions.

Central Steel & Wire continues to progress toward post-acquisition goals, exceeding customer account retention expectations, achieving approximately $32 million in annualized expense takeouts and realizing $12 million in cumulative proceeds from real estate sales for operations that were consolidated into existing facilities.

CS&W was acquired with significant working capital of nearly 140 days of supply of inventory, and management continues to target levels more in line with Ryerson's same-store service center metrics. However, days of supply increased slightly at the end of the third quarter to 92 days compared to 91 days for the prior quarter due in part to shipment declines reflective of industry demand weakness.

At the same time, the continuing industrial metal deflationary cycle, most notably in CRU hot-rolled coil price deflation, caused continued margin compression and inventory holding losses. As a result, CS&W generated an adjusted EBITDA, excluding LIFO loss, of $4.5 million in the third quarter compared to our expectation of adjusted EBITDA, excluding LIFO income, of $3 million for the period and compared to a loss of $2 million in the second quarter of 2019.

As high-cost carbon inventories cycle out, margins reset and cost takeouts renovate the expense structure of CS&W. Ryerson continues to view the company as having strong, commercial goodwill that is in the early innings of its turnaround potential. Management also continues to work toward its long-term mid-cycle target for CS&W of $600 million in revenue and $50 million in adjusted EBITDA, excluding LIFO, on an annual basis.

For the fourth quarter of 2019, Ryerson anticipates revenues of $960 million to $1 billion, with tons shipped down 6% to 9% compared to the third quarter of 2019 due to normal seasonality patterns compounded by slowed U.S. industrial growth, projected declines in global economic growth and business investment uncertainty.

Carbon prices are expected to bottom in the fourth quarter and aluminum prices are expected to be neutral to modestly lower, while stainless prices, despite a recent pullback in nickel prices, are expected to remain supported by low warehouse and stock inventories, as reported by the London Metal Exchange, secular demand expectations in the electrical vehicle battery market and export restraints on Indonesian nickel ore.

Collectively, Ryerson expects average selling prices in the fourth quarter to be down 3% to 5%. LIFO income in the fourth quarter is expected it to be in the range of $6 million to $10 million as inventory costs align more closely to replacement costs.

Given these expectations, Ryerson anticipates margins to expand in the fourth quarter of 2019 as inventory costs more align to current market prices, and therefore, expects earnings per diluted share to be in the range of $0.08 to $0.18 per share and adjusted EBITDA, excluding LIFO, in the range of $36 million to $40 million.

Ryerson expects to continue to deleverage in the fourth quarter with the continuation of countercyclical cash flows utilized to further reduce long-term debt.

With that, I'll turn the call over to Erich, who will discuss the highlights of our third quarter 2019 performance.

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Erich S. Schnaufer, Ryerson Holding Corporation - CFO [4]

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Thanks, Eddie, and good morning.

In the third quarter of 2019, Ryerson achieved revenues of $1.1 billion, a decrease of 11.6% compared to $1.25 billion in the third quarter of 2018, with average selling prices down 8.1% and tons shipped down 3.9%.

Gross margin was 18.5% for the third quarter of 2019 compared to 17.6% in the second quarter of 2019 and 16.7% for the same quarter last year. Included in cost of materials sold during the third quarter of 2019 was LIFO income of $29.6 million compared to LIFO income of $12.9 million in the second quarter of 2019 and LIFO expense of $32.1 million in the third quarter of 2018.

Gross margin, excluding LIFO, was 15.8% in the third quarter of 2019 compared to 16.5% in the second quarter of 2019 and 19.2% in the third quarter of 2018. Margin compression during the third quarter was impacted by mark-to-market hedging losses of $4.9 million and inventory costs falling at a slower rate than average selling prices, most notably, at CS&W, which continues to work down its large inventory positions in carbon sheet products.

Warehousing, delivery, selling, general and administrative expense decreased by $8.4 million or 4.8% in the third quarter of 2019 compared to the year-ago period. However, warehousing, delivery, selling, general and administrative expenses as a percentage of sales increased to 15% in the third quarter of 2019, compared to 13.9% in the third quarter of 2018, as revenue declines outpaced expense reductions.

Net income attributable to Ryerson Holding Corporation was $10.1 million or $0.27 per diluted share in the third quarter of 2019 compared to $77.5 million or $2.06 per diluted share in the prior year period.

Adjusted net income attributable to Ryerson Holding Corporation, excluding gain on bargain purchase related to the CS&W acquisition, gain on insurance settlement, restructuring and other charges and income taxes, was $9.2 million for the third quarter of 2019 or $0.24 per diluted share compared to $6.3 million or $0.17 per diluted share in the prior year period.

Ryerson achieved adjusted EBITDA, excluding LIFO, of $29.5 million in the third quarter of 2019, a decrease of $21.2 million compared to the second quarter of 2019 and $59.2 million lower than the third quarter of 2018.

Turning to year-to-date results. Ryerson generated revenues of $3.54 billion, an increase of 9% compared to $3.25 billion for the same period last year, with tons shipped 8.8% higher and average selling prices relatively flat. On a same-store basis, Ryerson generated revenues of $3.08 billion, slightly up from prior year-to-date revenues of $3.07 billion, with average selling prices 2% higher, partially offset by a decrease in tons shipped of 1.6%.

Warehousing, delivery, selling, general and administrative expenses increased by $50.5 million or 11.4%, an increase as a percentage of sales from 13.6% to 14% in the first 9 months of 2019 compared to the same period last year. Notably, on a same-store basis, warehousing, delivery, selling, general and administrative expenses decreased by $6.7 million or 1.6%, and decreased as a percentage of sales from 13.3% to 13.1% in the same period.

Net income attributable to Ryerson Holding Corporation was $56 million or $1.48 per diluted share in the first 9 months of 2019 compared to $105.4 million or $2.80 per diluted share for the same period in 2018. Adjusted net income attributable to Ryerson Holding Corporation, excluding gain on bargain purchase, restructuring and other charges, loss on retirement of debt and income taxes, was $56.3 million for the year-to-date period of 2019 or $1.49 per diluted share compared to $34.2 million or $0.91 per diluted share in the prior year-to-date period.

Adjusted EBITDA, excluding LIFO, was $143.2 million in the first 9 months of 2019 compared to $257.5 million in the first 9 months of 2018.

At the end of the third quarter of 2019, Ryerson had 76.4 days of supply in inventory, or 74.2 days on a same-store basis, up from 73.6 days at the end of the third quarter of 2018.

Our same-store inventory levels were within our target range of 70 to 75 days, while CS&W continues to work towards achieving acquisition post-closing inventory targets. We maintained ample liquidity throughout the quarter.

As of September 30, 2019, borrowings were $441 million on our primary revolving credit facility with additional availability of $395 million. Including cash, marketable securities and availability from foreign sources, Ryerson's total liquidity increased to $455 million as of September 30, 2019, compared to $441 million as of December 31, 2018.

We generated cash from operating activities of $82.5 million for the third quarter of 2019 compared to cash used in operating activities of $44.5 million in the year-ago period, primarily driven by lower working capital requirements.

We are pleased that Fitch Ratings assigned a first-time B+ rating to Ryerson with a stable outlook in recognition of our improved operating performance and disciplined balance sheet management. Ryerson continued to strengthen its balance sheet by utilizing the majority of our cash provided by operating activities to reduce debt outstanding by $77.1 million, while also investing $9.1 million in capital expenditures in the third quarter.

Compared to December 31, 2018, total debt decreased by $114.7 million and book value of equity has increased from $75.9 million to $141.1 million.

Ryerson expects to continue generating significant cash from operating activities in the fourth quarter of 2019, given lower inventory replacement costs, coupled with our normal, seasonally lower working capital requirements.

Now I'll turn the call back over to Eddie to conclude.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [5]

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Thanks, Erich.

While pricing and demand conditions certainly proved challenging in the third quarter, particularly, after July and August mill announced price increases failed to materialize, Ryerson has again proven adept at advancing our strategic initiatives while gaining market share and generating countercyclical free cash flow despite the current recessed market conditions.

We expect to further reduce leverage and expenses as we move through year-end, while improving operating leverage as we transition back to improving price and demand industry fundamentals longer-term and more structurally. Despite transient deflationary factors, our long-term value thesis continues its emergence around providing consistently exceptional value-added customer experiences across a network of intelligently connected service centers at a local, regional, national and international scale.

With that, let's open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question come from the line of Martin Englert with Jefferies.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [2]

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Within the release you talked about working through the higher cost inventory and then commented on adjusting inventories to current and anticipated demand. Looking ahead through fourth quarter and 1Q '20, are you planning further reductions within the inventories or rather do you expect some restock now if you're thinking carbon steel prices have bottomed?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [3]

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I don't think we have to restock just yet. I mean, I think, we're getting to a point of neutrality. Martin, here's some news you can use though. We went back and we looked -- we've looked carefully at what we call duration of cyclical periods and countercyclical periods, and we're in the fifth quarter now of a countercyclical period. The average duration of those countercyclical periods tend to be about 8 quarters. So we've got a couple more quarters to go probably of that counter cyclicality, all other things being equal based on the information we have available to us now.

Our RCSS group did some really good analysis and 88% of the time over the last 10 years, the HRC price has been above $475. The CRU print today was $444. So I think the probabilities are on our side. I think the probabilities are on the industry side that we're going to come out of this bottom, and we're going to see better pricing fundamentals going forward.

If you look at the Bloomberg commodities subindex, prices lead the industry down, demand follows and then at some point, similar to 2015 and '16, prices inflect back up and demand should come back up with it with about a 1 to 2 quarter lag. That's what the history would show.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [4]

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So based on your commentary, it would seem that we're maybe in for some continued headwinds, maybe through first half of '20, if we have a couple more quarters to go here with some anticipation that maybe some pricing recovery at that point.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [5]

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Yes. And I think that just the tailing out effect of average cost, getting to replacement costs and then seeing average costs move below replacement costs which is how that works. I mean, if you think about it, we had 2 head fakes this year that actually came at ironic times. But I mean at the time we had our Q1 call, with -- April, May, and you could see a flattening of the CRU numbers, and it looked like they might inflect up. Back in July, August, if you remember, and I know you do, the mills announced price increases that turned out not to materialize. So during those 2 periods, in particular, prices leveled out and actually went higher, but didn't stick.

I think it really matters -- what matters is, when do you receive the inventory, right? So you're receiving stuff now that you bought 4 weeks ago, 6 weeks ago, 8 weeks ago, depending on whether it's HRC, cold rolled or coated. And so now you're getting that inventory in from 1 to 2 to 3 months ago. But looking forward, clearly, that replacement cost is going to be trending more aggressively down towards average and then moving below that.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [6]

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Looking at -- there was more notable dip -- double-digit declines versus the prior year across both aluminum and stainless volumes. Can you touch on what you're seeing in those products and end markets and maybe expectations over the near term into early 2020?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [7]

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Yes, sure. I mean, I think it's just general softness that's been noted in machinery and equipment and some of the other end markets. But I'll let Mike and Kevin give you some more color on that.

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Michael J. Burbach, Ryerson Holding Corporation - President of North-West Region [8]

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Hi, Martin. This is Mike Burbach. I think, Eddie's right. There is just more general softness than any one thing that you can put your finger on, but what we did see from an end market perspective is continued strength on a relative basis in commercial ground transportation, much of which attributed to Class 8 trucks.

HVAC continued to be strong for us this year. And then when you look at the metal fabrication and machine shop sector, I look at that sector as an area that's highly transactional in nature and really reflective of Ryerson's ability to improve its business model, gain share, as we continue to invest in speed and responsiveness and then having the right inventory in the right places.

So we continue to see those areas deliver better than average results and we saw some declines as noted in the release, in food and agriculture, oil and gas. And I think some of that has been well documented previously.

So other than that, I think it's more of a typical type situation, and some of which I think, as you look at our overall performance for the year, we are trending in a much better spot than what the MSCI is reporting to have happened. So -- but we're going to continue doing what we have to do which is take care of the customer and give the best service there is out there and I think all else will take care of itself.

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [9]

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Martin. This is Kevin Richardson. Just more commentary in terms of an end market that's impacting aluminum is, we are starting to see the effects of the well-publicized drop in the Class 8 truck market. And the current outlook for 2020 right now is to get back to about 2016 build levels which is down 30%, and it's -- if you look at it on an absolute basis, it's actually a pretty good build rate, but it's coming off of a peak. So that's about a 30% drop in terms of what's anticipated next year relative to this year.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [10]

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Okay. So just to make sure that I'm reading it right. Based on some of your end market commentary and then your analysis of kind of 8 quarters maybe of a downturn average duration. When we think about the industry as a whole and look at like MSCI data volumes as a proxy, would you continue to expect year-on-year contraction for the industry moving through first half of '20 based on what your customers are seeing and what you're kind of thinking internally?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [11]

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Yes, Martin, this is Eddie. I mean -- I think we will have to deal in probabilities. And I think if we get -- if we see prices stabilize and it looks like prices are stabilizing, hopefully what we see is by the middle of Q1, we start to see prices going up, average costs and inventory coming down as I noted with demand surfacing about at that time. I think we come through that blackout period, which coincides with China's New Year, which is sort of how it's been the last several years. And once we get to about mid-February, I think the probabilities are weighted more towards seeing recoveries in price and recoveries in demand as we get to about mid-Q1, and hopefully, we build from there.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [12]

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Okay. That's helpful in understanding the cadence there. And then when you look at your downstream end users, any insights into their inventory positions and plans over the next couple of quarters, both as you think about their metals inventories that they're holding as well as finished goods that are containing metals further downstream?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [13]

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Yes. I'm going to ask Mike and Kev to comment on that in just a minute. But I would say, in general, moving through the fourth quarter at least, I think people are still adjusting their inventories lower.

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Michael J. Burbach, Ryerson Holding Corporation - President of North-West Region [14]

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Yes, Martin. This is Mike, again. I agree with that. I think with the price uncertainty that we've seen, there seems to be a correlation with how people approach their inventories when they think tomorrow's price is going to be lower. So I think just given the time of year, some of the uncertainty in the market place, there is a trend right to lean out inventories, but it really is a customer-by-customer situation. I've heard people taking them down. I've heard other people thinking differently, so -- but generally, if there was an overall trend, I would say, given the time of year, you would see little bit of a retraction on the inventory levels.

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [15]

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Hey, Martin. Kevin. One other thing that I would add is I think with the drop in the CRU and Eddie referenced some of the historical numbers and where it is right now, I think there is consensus in the marketplace with our customers, thinking that it's got to be closer to the bottom in terms of more -- there's going to be more to the upside than there is to the downside. So just in the last week or 10 days, we're starting to see some contract customers getting ready to make a move and commit going into next year.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [16]

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Yes. I mean I think -- Martin, I'll tell you. Going back to 2015, again, what was so instructive about the end of 2015 was you saw HRC get to $400 in that range, it really started to cause supply chain destruction, I mean, real supply chain destruction. And so even with a CRU print today, even though we're still 2 weeks away from the official CRU number for the December reset, CRU print today at $444 tells you that, again, when you look at the probabilities -- because it always looks real -- I mean it looks bad at the moment, but when you look at the probabilities with the 10-year average HRC price being about $623. And it having being above $475 88% of the time, I think you just go back and you look at the probabilities.

I mean, we don't know if at any moment in time over the next 30 days, it may trade below even today's CRU print. But again, you go to the probabilities, and it really looks -- it looks like the conditions are present for that price to start moving higher.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [17]

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Okay. I would imagine if they don't get it with this round of price increases or into early 2020, then you'll have to see some supply-side response from the mills here.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [18]

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Yes.

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Operator [19]

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Your next question comes from the line of Chris Terry with Deutsche Bank.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [20]

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Just a few questions for me. A lot in that first part. Just in terms of some of the legacy contracts at Central Steel & Wire. Just wondered if you could talk through the timing on that and just discuss the inventory level clearing.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [21]

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Sure. I'm going to kick that over to Jim Claussen, who's with us today. I would tell you this. I mean, Central's got 85% exposure to carbon. And at the point where we closed on the purchase of CS&W, as you know, we were at peak in industry conditions and Central had had a history of really going long physically against their contract commitment. So we -- that's really exacerbated this unwinding process amidst this margin mudslide. So I think there's a lot to work through in that. I'm going to kick it over to Jim and he'll walk you through some of the finer points.

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Jim Claussen, Ryerson Holding Corporation - President of Central Steel & Wire [22]

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Yes, Chris. As Eddie said it, we really started with an extremely long position in last -- at the end of last year, and as we've gone through this deflationary cycle, we've worked down the inventory levels to where we can start to balance out the supply and demand side of our business. The team's done a really nice job working those levels down, however, we've done it as prices have deflated throughout the year, quarter-over-quarter. So as we see replacement cost get above our average cost inventory as the inflection happens, we'll be in a really strong position going forward.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [23]

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Okay. And just in terms of thinking about where we are in the cycle, and I think you're still targeting 20% gross margins. Just wondering how you're thinking about that. How long that might take? And just your latest thoughts on the -- your ability to expand the margins back out?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [24]

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Yes, absolutely. So let me give you a perspective, okay? So I -- as I was doing my prep for the call, I go back and I look at Ryerson in terms of 4 games, and one game was played between 2007 and 2010, another game was played between 2011 and 2014. We just got finished with the last game, which was 2015 through 2018, which takes you through the beginning of a countercyclical period all the way up to maybe another cyclical peak, at least in our industry, when you look at the numbers.

And so we're starting this fourth game, right, of 2019 to 2022. And when we look at what's going on with our value add and the investments that we're making, all things being equal -- because right now, when you see HRC go from $900-plus down to $444, you've got to deal with that. And the good news is, we've been through it enough times now that we know how to run this countercyclical playbook. But in the next 4 years, I certainly expect us to stabilize around that 20% target in the next 4 years, and we've said that.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [25]

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Okay, okay. And just the last one for me, just specifically on the price hike announced last week in carbon. Can you just talk about the reaction to that in the market since and how that's going downstream?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [26]

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It's really early to say. As long as the CRU keeps going down, it's going to -- that's going to somehow counteract that. So I think we really have to see where the reset number comes out in 2 weeks. But I think it's reflective of this and that is, if scrap prices are going to be up 10% to 20%, and lead times are at least going to stabilize, then at least you have the conditions, with imports being where they are, you have the conditions for those price increases, at least part of them to start to stick.

Now the fourth quarter is always an uncertain time for taking inventory positions just because seasonally demand is softer, and you have less shipping days in that period. And as Mike referenced, it is very true that, as prices are falling, people don't tend to take that replacement cost into their inventory if they think tomorrow's price is going to be lower.

All that said, this'll take a little bit of time to matriculate. Even if price -- even if the price increases stick, the material that you're buying now, you're not going to get for 1 to 2 to 3 months. So I think that puts us into the first quarter of 2020, but I do think that given where prices are now, the recent price increases have a better chance of sticking than the ones that were announced in Q2 and Q3.

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Operator [27]

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Your next question come from the line of Joel Tiss with BMO Capital.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [28]

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So CS&W, I don't know if you said how many -- what's their average days of inventory versus Ryerson and kind of how long is it going to take to mesh the 2 together to get them to be more like you guys?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [29]

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Yes. In the script, we referenced 92 days. They have been as high as 140 days. I mean when we acquired them, they were actually above 140 days. So we've taken about 50 days out. And that realignment continues as it resets to really what we think is intrinsic demand as you go through the different seasons of an MSCI [5-year]. So we're going to see convergence between their inventory turnover metrics and Ryerson's existing inventory metrics with maybe just a little difference in that, Central's more weighted to long and tube. So we might carry 2 to 3 to 4 to 5 more days, just given the mix of sheet versus long and tube, but you're going to see a convergence for Central. It's going to get below 90, and it's going to start trending towards 80 as we get through 2020.

Jim?

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Jim Claussen, Ryerson Holding Corporation - President of Central Steel & Wire [30]

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Yes. I mean -- Eddie, you answered it pretty completely there. I would say. We're really into that next phase of inventory using analytics, really making sure we have A items placed appropriately for customers, working through some of the tailing out of B or C items that were over positioned. Takes a little longer, obviously, to change your position on a B and a C item than it does on an A, so working our way through that. We're -- I would say we're -- to that next phase. And Eddie -- as Eddie said, we're working our way into the 80s and should see a pretty good convergence here.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [31]

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Yes. Joel, as I kind of referenced, I mean metaphorically, I just -- it really feels like we're starting that fourth game, in that 4-year period. It's like an NBA game. It's like we're early in the first quarter, and we're a really good team. So I like our chances.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [32]

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Yes. You guys have done a very -- like very consistent, methodical improvement through all the variations that the end markets keep throwing at you. And are there any -- is there work still to do on sort of like your customer, like CS&W's customer base? Some of them, I'm sure, are better than others in terms of profitability or volumes. Or is a lot of that, you can spread it across all the different products you have, including Ryerson, and you don't really need to do a whole lot of like product line simplification and customer calling?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [33]

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Yes. One of the really great attributes of Central is -- and I think we mentioned this before, with such a unique acquisition in this way is that Central has customer goodwill. I mean, they really have good brand value and a good brand in the marketplace, but the operation itself needs modernization. And so I think the commercial portfolio was really well situated, and actually, we've seen a really nice synergy and that's continued even through this downdraft. We've seen a really good synergy between Ryerson and Central in terms of Ryerson being able to tap the Central inventory to enhance its product offering across the Ryerson network of customers that pre-dated the Central acquisition. I think with Central, Joel, the real key is to modernize the operation of the systems in that business to get their cost very close to Ryerson current cost benchmarks and working capital benchmarks, and there's a lot of operating leverage in that business, but it really needs to go through a systems and process reengineer modernization.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [34]

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And I didn't hear if you guys gave a free cash flow estimate for 2019? Even if it's kind of a ballpark-ish.

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Erich S. Schnaufer, Ryerson Holding Corporation - CFO [35]

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We didn't give a number, but we said that we would continue to generate significant cash flow in the fourth quarter. Again, we hit our seasonally low inventory and AR balances. And so that throws off a lot of cash in the fourth quarter.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [36]

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Okay. And then just last one for me. Can you talk a little bit about the balance, like more philosophically between using your liquidity for further debt reduction or looking to consolidate the industry a little bit more, given that it's kind of a difficult environment for everybody out there and might be some real opportunities?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [37]

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Yes. There's are a lot of deals that are coming to market, Joel. And let me say this, I mean if you look at our industry, in general, there's not a lot of general line service center businesses that are that attractive, that carry enough goodwill to get us interested. I think that they're either distressed and you take on that challenge, and you buy below book value or you find something that is really highly differentiated that adds a lot of value. You look for those gems, and then you really try to pay a reasonable multiple for those businesses.

But I mean given that we have Central, and we're just really a little bit over a year into that, and if you go back and look it over -- if you look over the last 3 years, I think our record for M&A has been really, really good, I mean, Central, Fanello, Guy, LaserFlex, Fay, STS, I think we need to take a little bit of a pause. I mean, we won't turn our backs on something that's really great, but I think we need to take a pause, use our cash, pay down debt, deleverage, then get our coupon down and really kick off that virtuous cycle. And we've looked at -- as we really envision this shift in enterprise value from debt to equity, if you look at where our average selling price is today at around, I think, was it 18 47?

If you looked at our average selling price today at 18 47, and if you look at the average ASP, really, I'd say in the industry over the last 10 years, there's still another $100 per ton roughly that you would wring out of the balance sheet going from today's price to about the industry average, all things being equal.

So we've got a lot of cash still stored up in our balance sheet. There's still a lot of cash there, and I think our operating model continues to get better as we move forward. Plus, we're going to see lower cost in inventory as we move through the next several quarters. So we're going to get that margin reset. And in 2016 -- going back to a question that Chris Terry asked, if you look at our margin performance in 2016, it was great. And I think if we're going to have to go through these boom and bust margin cycles, there really is -- there is sunshine on the other side.

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Operator [38]

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Your next question comes from the line of Phil Gibbs with KeyBanc Capital.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [39]

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First question is just on this GM strike and how that's played into the psychology and then maybe some of the various different end markets or whether it has -- I mean, it's deserving to be discussed because we haven't seen something like this since the '70s.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [40]

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Yes. No, that's a great question. I think practically it's really had an effect. And I think that's been well reported on. I think there's also been the Volvo Mack Truck strike as well. So you've got 2 strikes going on in the fourth quarter that certainly haven't helped metals consumption. Kevin's a little bit closer to it, so I'm going ahead and kick that over to him.

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [41]

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Phil, we don't do a lot directly in automotive. So it really hasn't impacted us in a big way in terms of direct customers. We do have some Tier 2 relationships that -- it's been somewhat disruptive but not -- it hasn't been a big needle mover for us. I think it's more about the psychology of what that does on the supply side in terms of from the mills and what that does to capacity utilization. But in terms of demand impact to us, it's been pretty insignificant at this point.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [42]

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Yes. Just been interesting to see the mills continue to produce at an 80% rate, I think, despite the fact that probably there are some sales that aren't taking place at the moment. So there's certainly some level of supply being stored perhaps in some -- go ahead.

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [43]

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No, I was just going to say I think that's our read as well in terms of the impact on the producer side. And I think the capacity utilization is actually down into the high 70s. Now, I don't know mill by mill, but I think on a blended rate, it's actually below 80% now.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [44]

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Phil, if we do some napkin math, and you just look at the change in imports, but look at where MSCI shipments are coming out on a monthly basis, we're trending back to that 2016 level of shipments so we can take that delta in imports. And then look at the change in domestic -- domestic output, I think your conclusion is more accurate than not.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [45]

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Okay. A question that relates to you all on the operating expense side, I expected operating expenses to be a bit lower than they were. Is there some integration expenses that you still have running through from the side of Central that are kind of hanging in there? Because I noted that you all talked about, in your script, that there's some leverage to come and/or lower, I think you said renovation, of expenses to come. So curious in terms of how we should be thinking about the expense side moving forward.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [46]

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Yes. I mean we've been carrying some improvement project costs across the water, and that's going to benefit us. I mean, as we see our operating leverage improve as we come up through the next upturn, some of the projects we're doing are going to be very worthwhile and early returns on those projects are really positive. So you don't get the full monetary benefit as you're in the midst of those projects while the industry's deflating. But certainly, we've got some really good work that we can do in terms of rationalizing cost across our network, and that -- Central's certainly a big part of that, but we've got some work we can do across Ryerson as well.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [47]

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And last question here, Eddie. You had mentioned some systems and processes needed to reengineer Central, I think maybe on the analytics side to get you up to where you've been trying to get the legacy business. What is that going to potentially cost? Or is costing from a CapEx standpoint? Or are those costs being run through the operating expense line, how do we think about that?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [48]

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Yes. I mean I'm going to kick it over to Jim in a sec. I would just say right now that the cost hasn't been that large because we're going through the reengineering process of documenting what those processes and systems are going to be. But as they start to mirror Ryerson, and we start to think about how to hub CS&W into our existing ERP environment, there'll be a cost to that. But I think you can't go faster than the organization can assimilate those changes. And so I think into 2020, we're going to see some changes, but we don't see the cost as really being that high. We'll take it in measured doses because we have to move with the workforce and with the other restructuring activities that are ongoing.

Jim?

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Jim Claussen, Ryerson Holding Corporation - President of Central Steel & Wire [49]

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Yes, we -- anything that's been done on the system side would have rolled through OpEx in that regard this year, but it has not been significant in the way we're doing things, so really working on the operating model, putting the processes in place, and then, we'll look to be modernizing the systems as we go forward, as Eddie said.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [50]

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Yes. I mean, Phil, we really want to keep building the tangible net book value of the company, and we've made really good progress in that regard over the last 4 years, and I think that's a good thing for us to focus on, is just continue to build that tangible net book value of equity across the enterprise. Take a page out of the Warren Buffett playbook.

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Operator [51]

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Your next question comes from the line of Matthew Fields with Bank of America.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [52]

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We saw the $444 data point from CRU, but understand that works on a lag. And then steel market update seems to see kind -- spot prices trending more towards about $480. So it seems like that $40 per ton price hike is kind of working. Are you seeing indications that would sort of bolster that, that train of thought?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [53]

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Yes. I mean, Matt, it's early. I mean you don't know until you know. I mean I -- again, I think that we thought that in April, May, we thought that in July, August. I mean we're going to have to see, I mean really, how the mills enforce that price increase across the spectrum of demand. I mean we have to see. I mean early indications are positive.

If you look at the same SMU Sentiment Index though, that sentiment index spiked up at the time that the last mill price increases were announced in April, May and July and August. So really, I mean it's really up to the mills. It's up to the mills and it's up to the customers.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [54]

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And is that -- is there -- do you think the recent announcements on price hikes are informed by November scrapping up $20 or is that sort of November being up $20 kind of have a further upside to where we are now?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [55]

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I think it's helpful. I mean I think if you look at iron ore. Even Iron ore -- even though it spiked to $125, it's still in the $80s. And so scrap is certainly a better value than, I'd say, fully yielded iron costs or virgin iron costs through a blast furnace in the BOF. Scrap is still the more attractive alternative so you see scrap up by $10 or $20, and you see pig iron prices still above $300. There is some support for those increases as we move into Q1, just noting that Q4 is softer on the demand side. But if you look at the cost push side of it, supply side of it, there should be some support there for prices to come off their current level.

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [56]

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Matt, it's Kevin. One other data point that just supports the direction of hot roll. If you take a look at the futures number, the premium for Q1 is about $60 a ton over today's number. And I think that market is gaining liquidity in terms of the number of contracts over the last couple of years in terms of the buyers and sellers in the future. So anyways, that number is a $60 premium over a today's spot.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [57]

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Over the $444?

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [58]

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Yes. It -- I think the print actually came out today. So this was a as a couple of days ago. So that directionally -- it's about -- that spread should be about right.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [59]

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Yes. I mean I think the first half is showing $570, and I think Q1 was showing $540. It's a pretty big spread there. But again, I think on the cost push side, when you triangulate iron ore, scrap and pig iron, there is some support for these increases.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [60]

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Okay. And then -- appreciate the guidance on cash flow generation in the fourth quarter. Is there any way we can kind of put some brackets around a range of cash flow generation you're comfortable forecasting?

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Erich S. Schnaufer, Ryerson Holding Corporation - CFO [61]

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Well, I mean, if you took a look at where our inventories and AR has come down in prior years in the fourth quarter, you can get a pretty good sense of the magnitude of what we're going to generate in the fourth quarter, together with what your -- what the estimates are on EBITDA in the fourth quarter. But overall, the biggest driver is going to be depending on where AR balances end the year and assumptions on inventory.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [62]

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So you're kind of working capital adjustments in the fourth quarter of the last 3 years have been 50, 90 and 90? We take an average of those, are we in the right ballpark?

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Erich S. Schnaufer, Ryerson Holding Corporation - CFO [63]

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Yes. That's in the right ballpark. Yes.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [64]

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And then lastly, I think I ask this same question kind of every call. What are you guys waiting for in terms of -- other than sort of capital markets to tell you you're going to get a 5% coupon on an unsecured bond? What are you waiting for, for a refinancing? Is it kind of a leverage number? Is it a gross dollar amount of debt that you'd like to be at? Like what do you think is kind of the right trigger in a capital market that's kind of been open for a while?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [65]

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It's open. It's open, Matt, but it's open at a price. And I think if you look at spreads between Bs and CCC or even single Bs, portfolio managers have really diagrammed out the play. And I think it will be interesting to see what 2020 looks like once everybody has the chance to digest what was a really, really good year for PMs in the corporate bond market. So just given that we're between year 3 and year 2 of our call period, there's no rush to pay an incremental premium when we consider the business to be improving. And unless we get into a really long dated recession, which again the probabilities don't connote that right now, we think we're going to have better opportunities moving forward to refinance. So let's see what the market looks like when the lid comes off in 2020.

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Erich S. Schnaufer, Ryerson Holding Corporation - CFO [66]

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Another thing that we did during the quarter is we went out and we got our third rating, as you know. We had a split rating between S&P and Moody's with Moody's being 2 notches below S&P. And so by going out and getting Fitch's rating which reaffirmed the B rating on our notes outstanding, which is the same as S&P, we're hoping that, that investor education is going to get out into the market as well. So that when we go out and do the next refinancing, they really sharpen their pencils on what is the right coupon for a new issue going forward. And again, as Eddie had said, the next step down in our call premium in May of 2020 takes us from 105.50% down to 102.75%, and that's $16 million in savings. That's not a small number.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [67]

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So is it fair to say that, that May step-down is kind of the first time we could start to expect something?

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Erich S. Schnaufer, Ryerson Holding Corporation - CFO [68]

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That, unless someone wants to give us 5%.

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Operator [69]

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Your next question comes from the line of Sean Wondrack with Deutsche Bank.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [70]

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So just a couple of questions on some of the comments on the call, again. I appreciate all the color you're giving here. When you think about the Class 8 truck market and your expectations for next year, given that's when your bigger markets -- how do you expect to mitigate the decline there? Is there anything you can do about that internally? Or is it just whatever the market kind of hands you?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [71]

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Yes. I'm going to have Kevin comment on that. But when we through it in 2016 and building back up to this recent build rate peak, I think we did a really good job of taking out some costs and taking out inventory and really adjusting inventory to the build rates and working with our customers to continue to maintain margins from a cost to serve versus margin versus inventory perspective. But I'll Kevin give you more color on that.

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [72]

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Sean, the only thing I would add is with 100 locations in the geographic footprint that's all across North America, there's all kinds of opportunities of to offset any one end market in terms of the investments we've made in value-added processing and multiple product lines. So it's not like we're just an aluminum distributor, and we're at the mercy of the markets that drive that. So there's plenty of opportunities to offset it. We do have a relatively high market share in that end market. So we go up and down with it. It's been a great end market for us over the years.

And the other thing that I didn't mention is Class 8 gets all the headlines, but if you look at Class 5 and 7 trucks, that's a much more moderate decline going into next year. That's about 5%. And then there's other ground transportation vehicles that we service for end -- parts of the end market. Think about ambulances and fire trucks and things like that. So it's not just the Class 8, but there's plenty of opportunities to go offset things like that.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [73]

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That's helpful. And then in terms of oil and gas. You noted some weakness there. Have you seen that turn the corner here? Or are we in a period of uncertainty, so that's kind of restricting buying to a certain degree? What kind of patterns do you see?

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [74]

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Sean, it's Kevin. I'll take that one too because I handle the Texas and Oklahoma area. For starters, that's a relatively small end market for us. It's about 5% of our revenue. So it's -- it obviously -- it's more heavily skewed in the geographic pockets it services, but to answer your question, it is down. We don't see a big rebound. And what's interesting, if you look at the production, the U.S. oil production right now is at record levels. It's like 12.5 million barrels per day, but the extraction has become so much more efficient, it's just not as capital-intensive in terms of the equipment to get it out of the ground. So if you look at the -- rig count's down 20% from last year. And if you look at the drilled and uncompleted wells, they've also been declining for the last 6 months. So there's not a lot that we see going into next year that says that, that's going to snap back, even with record production. But again on a relative basis, that's a pretty small end market for us.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [75]

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Well, and I think we're seeing to a transition from downhole CapEx more to above ground in the distribution capacity of how you take it away and get to where it needs be in the oil and gas sector. And I think Mike's got a good perspective too because he's got -- Mike's got Western Canada.

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Michael J. Burbach, Ryerson Holding Corporation - President of North-West Region [76]

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Yes, thanks, Sean and Eddie. I think we see the same things. I think Canada has its own set of challenges that might be a little different than what Kevin described. But fundamentally, with the investments we've made and the inventory we put in place, we've actually been able to fare fairly well considering the overall conditions. So -- but the overarching issues that Kevin mapped out are pretty much the same up in Canada.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [77]

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Okay. And then Eddie, just to kind of go back to a couple of comments you made earlier about these deflationary periods that are usually roughly 8 quarters or about -- it's [straight] quarter now. Would you say that the magnitude of sort of the impact on EBITDA is felt earlier on in these periods and you're able to sort of stabilize to a certain degree kind of in the last few quarters? Or would you say it's pretty even throughout?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [78]

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Oh, no. I mean I think you chase that boulder down. And then when you start to get that retracement as average cost starts to converge to replacement cost and then moves below replacement cost you really start to see an expansion of margins and you start to see a really positive impact on EBITDA. And that's been the history if you go back and look at how we performed in those countercyclical and cyclical periods.

So I mean you do chase it down, and I think we're seeing some of that in the results in quarters 2 and 3, but having been through it several times and just looking at the leverage we have, the positive operating leverage we have in the business coming up on the other side, and the acquisitions we've done and the things that we've noted, I can't help but be positive moving forward. I mean again, I don't know. I mean if something exogenous happens or we get some type of extended, I'd say economic downdraft, then you've just got gut though over a couple of more quarters, but based on our historical analysis, we should be well past the halfway point.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [79]

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Great. And then did you do any on the upside -- how long the upside cycles basically last for ?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [80]

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It's interesting. The upside duration tends to be a little bit longer, but its less impactful, and the downside duration tends to be shorter and more impactful, if that helps. So it's typically about 8 quarters of -- on the downside, say 7 to 8. It's typically about 9 to 10 on the upside. And as we've modeled it in the macro, that upside tends to be a little bit more muted than the downside is. But we certainly -- we look forward to that upside.

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Operator [81]

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Your next question comes from the line of Phil Gibbs with KeyBanc Capital.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [82]

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Question is just on the value-add business in terms of how you define it, Eddie? And how much is that right now as a percentage of your mix, that value-add first-stage processing-type business? And where do you -- where would you like to get that over time?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [83]

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Yes, no doubt. So let me -- I'm kick that over to Mike and Kevin. Let me tell you, in general, once we get past cut-to-lengths -- so you've got as is distribution and you've got cut-to-length and you get into what we consider to be the heavier value add as you move from more general on value add to more advanced processing and even some contract manufacturing. We've seen that trend emerge nicely in our company, but as you know, it's a grind and it moves up and down with the cycles. But we've seen that progress really nicely in the company, Phil. And I would say just over the last 12 to 18 months, we've probably picked up about 50 to 60 basis points there.

And I'll have Mike and Kevin give you some more color on that.

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Michael J. Burbach, Ryerson Holding Corporation - President of North-West Region [84]

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Phil, this is Mike. So the definition is somewhat subjective to the situation, but as a rule of thumb, as Eddie mentioned, we process a lot of different things, a lot of which are quite simple and we don't put into the value-add category. But I would say something that has multiple processes done to it, so a burn and a bend, a laser cut and a (inaudible) [pole] whatever those things might be and in many cases, it goes multiple steps. That's -- would be our definition of value add, and a lot of which we're getting pulled into this direction by a number of customers to help them take out processes that they used to do in-house. And so they're looking to us to not just ship them the plates or the sheets and for us to take that work away from them. And they can focus on the areas that they're looking to be better at, which would be more on the assembly and marketing and design going forward. So I would say our value add is multiple step processes and beyond.

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Kevin D. Richardson, Ryerson Holding Corporation - President of South-East Region [85]

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Phil, this is Kevin. The only thing I would add to that, if you look at the acquisitions we've done prior to Central Steel & Wire, the main focus has been on value-add capabilities, Laserflex, Fanello, Guy Metals and STS have all given us capabilities. And the idea there was just to also build that business and grow with all of the commercial [contacts] that Ryerson has. So it's a combination of an M&A strategy and also some of the equipment that we've deployed internally.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [86]

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I get the strategy. I'm just curious where you are in terms of the game you said multiple steps. And just trying to understand how much of that is relative to your business? Is it 10%? Is it 40%?

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [87]

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Yes. I mean the way we measure it beyond cut-to-length -- so we're moving towards 11% and longer term, we would like to see a target of 15%.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [88]

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Are you saying that includes cut-to-length? Or that does not cut-to-length? I'm sorry.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [89]

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No, no. It's all cut-to-length. So what we consider to be value add beyond just general line processing.

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Erich S. Schnaufer, Ryerson Holding Corporation - CFO [90]

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And by moving from 10% to about 15% that should add about 30 basis points to 50 basis points to our gross margins on a consolidated basis.

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Operator [91]

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And there are no further questions at this time. I will turn it back over to the presenters for closing remarks.

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Edward J. Lehner, Ryerson Holding Corporation - President & CEO [92]

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Thank you for spending a part of your morning with us, and we look forward to seeing all of you in the New Year.

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Operator [93]

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Ladies and gentlemen, this concludes today's conference call. You may now disconnect.