Q2 2023 Ryerson Holding Corp Earnings Call
Participants
Edward J. Lehner; President, CEO & Director; Ryerson Holding Corporation
James J. Claussen; Executive VP & CFO; Ryerson Holding Corporation
Michael J. Burbach; COO & President of North-West Region; Ryerson Holding Corporation
Molly D. Kannan; Corporate Controller & CAO; Ryerson Holding Corporation
Pratham Dear
Alan W. Weber; Research Associate; Robotti & Company Advisors, LLC
Katja Jancic; Analyst; BMO Capital Markets Equity Research
Samuel J. McKinney; Analyst; KeyBanc Capital Markets Inc., Research Division
Presentation
Operator
Good day, and welcome to the Ryerson Holding Corporation Second Quarter 2023 Conference Call. Today's conference is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to Pratham Dear. Please go ahead, sir.
Pratham Dear
Good morning. Thank you for joining Ryerson Holding Corporation's Second Quarter 2023 Earnings Call. On our call, we have Eddie Lehner, Ryerson's President and Chief Executive Officer; Mike Burbach, our Chief Operating Officer; Jim Claussen, our Chief Financial Officer; and Molly Kannan, our Chief Accounting Officer and Corporate Controller. John Orth, our Executive Vice President of Operations; and Mike Hamilton, our Vice President of Corporate Supply Chain, will be joining us for Q&A.
Certain comments on this call contain forward-looking statements within the meaning of the federal securities laws. These statements involve a number of risks and uncertainties and that could cause actual results to differ materially from those implied by the forward-looking statements. These risks 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, 2022, our quarterly report on Form 10-Q for the quarter ended June 30, 2023, and in our other filings with the Securities and Exchange Commission. 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 non-GAAP measures to the most directly comparable GAAP financial measures is provided in our earnings release filed on Form 8-K yesterday, also available on the Investor Relations section of our website.
I'll now turn the call over to Eddie.
Edward J. Lehner
Thank you, Pratham, and thank you all for joining us this morning. I want to start by expressing my heartfelt thanks and appreciation to our 4,300-plus strong Ryerson team for their dedicated efforts and commitment to a safe and productive work environment that enables our mission of delivering great customer experiences throughout our network of intelligently connected industrial metals service centers. The second quarter of 2023 was a period of countercyclical headwinds in our Bright Metals franchise characterized by falling prices and slowing customer demand, particularly in our stainless product segment and late cycle end markets. While our business performed well, we are experiencing some short-term growing pains from greenfield service center start-ups in Centralia, Washington and University Park, Illinois, as well as a facility expansion and modernization in Shelbyville, Kentucky and ongoing ERP system conversions.
Despite some temporary discomfort, these investments are essential to Ryerson's next relay leg of its operating model transformation as we gather momentum toward our next-stage financial targets and create the best industrial metals customer experience across a wide expanse of metal selection, value-added distribution fabrication and service all at differentiated speed, scale and consistency. Coming back to countercyclical industry catalysts that popped during the second quarter and into the third quarter, we noted shipping consumer spending from goods to experiences, the impact of higher interest rates, credit tightening contractionary PMI and industrial production indicators, late cycle end markets and a long expected economic recovery in China that has thus far failed to materialize.
All that said, we've seen counter cycles many times before and managed through them well. Current manufacturing indicators aside, our enthusiasm and optimism around longer-term secular drivers for manufacturing growth in North America is undiminished. Taking a more holistic view of the second quarter. we've generated positive operating cash flow, increased our dividend for the eighth consecutive quarter and maintained our net leverage ratio within our target range while carrying our organic and acquisition growth investments over the aforementioned countercyclical waters.
With that, I'll now turn the call over to our Chief Operating Officer, Mike Burbach to further discuss the pricing and demand environment.
Michael J. Burbach
Thank you, Eddie, and good morning, everyone. I want to start by thanking our team for continuing to prioritize a safe and productive working environment as well as creating a culture of partnership with our customers and suppliers, where our extensive offering and capabilities can provide value while improving their overall experience. In the second quarter, we saw a continuation of shifting price trends in the commodities that underlie our product mix. Increases in domestic steel prices that started in the fourth quarter of last year and continued into the first quarter of this year reversed by approximately $300 per ton over the second quarter.
Similarly, supply exceeded demand, which impacted prices for our Bright Metals franchise as we saw continued declines in LME nickel and LME aluminum during the second quarter. Due to our sales mix, the continued declines in pricing on LME nickel and aluminum contributed to margin compression over the quarter. Despite the pricing turbulence on balance, our average sell prices price was in line with our guidance range for the second quarter at $2,709 per ton or flat sequentially.
Turning to the demand environment. Second quarter sales volumes were lower sequentially as we saw easing conditions in our end markets as customers slowed down industrial metals purchases during the period of falling prices, tighter credit conditions, and an uncertain economic outlook for the second half of 2023. Sequentially, volumes were lower by 4.4% led by shipment decreases in industrial machinery and equipment HVAC in food processing and agriculture and partially offset by strong increases in construction equipment and oil and gas. Although countercyclical conditions, as noted, pervaded in the second quarter and have continued early into the third quarter, industry inventories are better balanced to demand than a year ago, thus somewhat tempering near-term price pressures.
Finally, I would like to say that while we saw ebbs and demand conditions, Ryerson continues to partner with our customers for their long-term means. To that end, we continue to invest in equipment, technology, processes and our people. Strategic investments within our business as well as additions to our family of companies, have increased our value-added sales to 18% and which is expected to translate into higher and more durable margins throughout the cycle. And we continue to work towards our target of at least 20% value-added sales. We see the increase in value-added sales as a promising area of growth that will benefit from secular trends of nearshoring, decarbonization, creating an emergent need for smart manufacturing in North America, whereby our customers can benefit from our scale and value-added capabilities that will be complemented by our digitalized network of connected service centers.
Similarly, we are also excited about the upcoming start-up of operations at our new facility in University of Park, Illinois, which will serve as our long product hub in the Midwest with state-of-the-art equipment service capabilities and more efficient operations. Finally, our investments in improved facilities, IT infrastructure and enhanced value-added capabilities continue to support our drive to enhance our customers' experiences.
And with that, I will turn the call over to Jim for second quarter financial highlights as well as our third quarter outlook.
James J. Claussen
Thanks, Mike. Good morning, everyone. Before discussing the third quarter, I would like to highlight the drivers for our second quarter performance compared to our guidance expectations.
The primary driver in our second quarter volume shortfall with softness in later cycle end markets, which affected all 3 of our primary material franchises. Along with this broad-based demand-driven falloff, excluding strength in automotive, aerospace and nonresidential construction, stainless steel average selling prices and margins were further impacted by sharper stainless specific commodity price declines and still elevated channel inventories. But we expect strong long-term demand underpinnings in our Bright Metals franchise given decarbonization-led efforts, the supply-demand imbalance in the quarter significantly pressured market pricing and margins.
Looking to the third quarter of 2023, we expect volumes to be down sequentially compared to the second quarter, in line with normal seasonality. As such, we expect third quarter revenues to be in the range of $1.25 billion to $1.3 billion, with average selling prices down 1% to 2%. Based on these expectations, we forecast adjusted EBITDA for the third quarter of 2023, excluding LIFO, and in the range of $43 million to $47 million and earnings in the range of $0.31 to $0.43 per diluted share. We expect LIFO income of approximately $2 million. In the second quarter, we generated $115 million of cash flow from our operations, which included $38 million released from lower working capital requirements.
We ended the period with $396 million of total debt and $366 million of net debt. Ryerson's leverage ratio increased quarter-over-quarter to 1.4x, but remains within our leverage target range, while the company's available global liquidity remains robust at $790 million. Due to our improved capital structure, and multiyear progress deleveraging the company. Ryerson generated $196 million of cash flows from operations in the first half of 2023 compared to $168 million in the first half of 2022. With a healthy balance sheet and several highly accretive strategic projects, we remain focused on investing back into our business through the cycle.
Capital expenditures were $46 million in the second quarter, which included $24 million for the purchase of building and land related to the BLP Holdings acquisition. Given this real estate purchase, our updated expectations for full year 2023 capital expenditures are now approximately $125 million. This amount comprises both maintenance and growth projects, including service center modernizations. We are very excited about the modernization efforts taking place across our network which will continue to drive better customer experiences, enhance long-term potential of our equipment and improve asset utilization.
Turning to shareholder returns. Ryerson returned approximately $57 million in the form of share repurchases and dividends. The largest contributor to that figure was an opportunistic $50 million repurchase of 1.4 million shares from our largest shareholder, Platinum Equity, in conjunction with their secondary offering. Their sale and our repurchase has contributed to our free float reaching 77%. After having increased our share repurchase authorization to $100 million last quarter and extending the term to April 2025, we currently have approximately $50 million remaining on our authorization and we'll continue to prudently evaluate our shareholder return opportunities as well as our overall capital allocation strategy to maximize long-term shareholder value.
During the quarter, we also returned $6 million to shareholders in the form of a quarterly dividend of $0.18 per share. Additionally, we announced a third quarter cash dividend of [$0.1825] per share, an increase of 1.4%, marking our eighth consecutive quarterly dividend raise.
With that, I'll turn the call over to Molly to provide further detail on our second quarter financial results.
Molly D. Kannan
Thank you, Jim, and good morning, everyone. In the second quarter of 2023, Ryerson reported net sales of $1.3 billion, which was 5% lower sequentially driven primarily by 4% lower volumes. In the same period, gross margin of 19.4% was an expansion of 60 basis points versus the previous quarter. Excluding LIFO, gross margin fell 40 basis points from the first quarter to 18.7% as our average selling prices for our stainless steel sales mix decreased faster than cost of goods sold. On the expense side, warehousing, delivery, selling, general and administrative expenses increased 4% sequentially to $203 million, driven partially by higher expense related to our acquisitions, higher depreciation from additional assets placed in (inaudible) reorganization expense related to systems implementation and start-up costs associated with the University Park Service Center -- which were partially offset by lower fixed operating expenses.
For the second quarter of 2023, net income attributable to Ryerson was $37.6 million, or $1.06 per diluted share compared to net income of $47.3 million and diluted earnings per share of $1.27 in the prior quarter. In the first half of 2023, net income attributable to Ryerson was $84.9 million, and diluted earnings per share was $2.33. Finally, Ryerson achieved adjusted EBITDA, excluding LIFO, of $70 million in the second quarter of 2023, which compares to $90 million in the prior quarter. Free cash flow generation was $69 million this quarter and compares to $53 million in the prior quarter period, driven by operating earnings as well as working capital relief.
In the first half of 2023, Ryerson has generated $160 million in adjusted EBITDA, excluding LIFO and $122 million in free cash flow.
And with this, I'll turn the call back to Eddie.
Edward J. Lehner
Thank you, Molly. While we encountered countercyclical headwinds during the quarter sooner than anticipated, our belief in the greater and sustained need for longer life manufactured assets to improve quality of life and better the human experience remains resolute. Metals are the perennial materials enabling both the remedial and transformative manufacturing and building required to meet the formidable challenges of these times and beyond. The investments Ryerson is making through the cycle in our network of intelligently connected industrial metal service centers that deliver customer solutions with joy, speed, scale, value-added consistency positions Ryerson and its stakeholders well for an enduring and valuable future as these immutable trends play out in the years ahead.
With that, we look forward to your questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) And our first question is going to come from Katja Jancic from BMO Capital Markets.
Katja Jancic
First, maybe if we can start with margin outlook. Can you talk a little bit about how you think -- how you're thinking about margins over the next few quarters? What are some of the puts and takes there?
Edward J. Lehner
Katja, 3 cases when it comes to margins, I think there's evidence right now that the upside case would be stabilization. And there are actually signs you look at the Bloomberg industrial metals sub index. When we were having our conference call a quarter ago, that was at 170. It got as low as 120. It's actually rebounded to 150. So I think there's a good case to be made for stabilization, maybe on the upside. Base case, I'd say mild counter [cycle] effects where you're still going to see indexes drift lower through the quarter. And so you'll see some margin compression as a result of those falling prices. But base case is going to be mild and that's more or less reflected in our guidance. And then there's a downside case where you have a more aggressive counter cycle and there's more pressure on prices. There's falling demand.
And so you've got a lot of competitors that are trying to take orders and POs off the street by bidding more competitively for those orders. So 3 cases -- and that's how we would see it over the back half of the year.
Katja Jancic
And then I think I heard that the CapEx increase is driven by land purchase. Is that correct?
Edward J. Lehner
Yes. It was a good opportunistic purchase. We did the BLP acquisition towards the end of the first quarter of 2023, and we had an option to purchase that land. We're certainly bullish long-term on industrial real estate. So we saw it as a good opportunity, so we went ahead and exercised that option.
Katja Jancic
And what is the plan with that land specifically?
Edward J. Lehner
I'm sorry?
Katja Jancic
What is the -- are you planning to maybe build that land? Or how are you thinking about it?
Edward J. Lehner
There's 3 facilities that are on that industrial property site. And we just like the property like the real estate like configuration and gives us more control if we decide to expand those assets going into the future, but also we think it's just going to create value longer-term when we look at it as part of our industrial real estate portfolio.
Katja Jancic
And maybe just 1 last one. What -- can you remind us what the maintenance CapEx is right now?
Edward J. Lehner
Yes, maintenance CapEx is running at about $30 million per year as we picked up some additional square footage through our acquisitions. So we can get down to, I'd say, about $30 million in maintenance CapEx. Looking ahead, just given some tactical adjustments that we'll make going forward based on economic conditions. Right now, I would say, early look at 2024 would be -- we would reinvest in CapEx at the rate of GAAP depreciation plus the carryover from 2023. And we think it's really important, given that we have the ability and we have the liquidity, it's really important to carry these growth initiatives sort of across these countercyclical waters and see them through to the benefits that we believe they're going to provide.
Operator
(Operator Instructions) We'll take our next question from Samuel McKinney, KeyBanc Capital Markets.
Samuel J. McKinney
I wanted to start off on operating expenses. Volumes were down 4% in the quarter versus the first quarter but your warehouse delivery and SG&A expense increased by 4%. Can you talk through the specifics of what happened to drive that OpEx number higher despite the decrease in total volumes.
Edward J. Lehner
Yes, sure. Part of that sequentially, Samuel, is reorganization. And then really, that's about -- and I'll have Jim add some commentary to this. But we've got about $3.2 million in reorg that goes to that expense bridge quarter-over-quarter. And then we have about $4 million that's related to acquisition activity sequentially. So that's the majority of it. It's growth based. As we move through the back half of the year, we'll be able to flex down our costs, as I mentioned in the earnings release. We're very good at it. We know how to run a countercyclical playbook, and we'll be able to further (inaudible) these investments as we move through the back half of the year. Jim, do you want to add any color to that?
James J. Claussen
No, Eddie, I think you covered it really it's -- it was a function of some acquisitions we added and then the initiatives with some reorganization costs. And Sam, we would expect those costs to be the reorganization cost to be maybe $4 million to $6 million in Q3.
Samuel J. McKinney
Okay. Okay. And then your outlook for the third quarter on pricing and mix is holding in pretty well, only down 1%. Is that a function of higher value stainless aluminum being a higher sequential percentage of the mix in the third quarter? Or are you expecting pricing to hold in better in certain areas of carbon?
Edward J. Lehner
Yes, let's go ahead and we'll kind of [unpack] it like this. There are some signs that we're seeing stabilization coming off of a Q2 that maybe countercyclical conditions arrived the quarter before we anticipated at the time that we offered guidance last quarter. So there are some increasing signs of stabilization. Obviously, when you look at end markets, automotive has performed better. Aerospace has performed better, nonresi has performed better as we show in our investor deck, broad-based industrial has been in a malaise, which has tracked the indicators around PMI and industrial production, but we did see some strength in construction and heavy equipment and energy as well. But the consumer right now is showing fatigue. You've seen a shift in spending.
So durable goods and goods -- manufactured goods related to the consumer, you can see the impact of higher interest rates and a change in preference as to how those dollars are spent. So I'd say upside cases, we see stabilization around price and demand and then you start to see a reset of replacement cost, which starts to expand your margins as you go through the quarter. Base case is, again, mild countercyclical conditions that are more or less represented, not more or less, many represented in our guidance view for the quarter. And I think stainless, again, be more levered to the consumer, stainless that countercyclicality is still playing out. There's been more of a stabilization around aluminum and aluminum demand and more of a stabilization for now around carbon demand.
So that's how we would see it on the commodity side. But I'll ask Mike Burbach to pitch in with any additional comments you may have.
Michael J. Burbach
Yes. Thanks, Eddie. No, I think you hit the high points already there, Eddie. So the stabilization is something that we're watching. There was a lot of change that took place through Q2 with futures prices of nickel and aluminum coming down off of places where they were late in Q1 which triggered maybe some demand deferral in Q2, especially in stainless steel, where industry shipments were off nearly 8% sequentially from Q1. So -- but that appears to be stabilizing to some extent, but we'll play it as she comes.
Samuel J. McKinney
Okay. And then lastly for me, I know that a stringing together a lot of value-add M&A can have a big impact on your margins. But Eddie, you mentioned recently that the market for any really sizable M&A has been difficult to complete, given the extended valuation. Now how has that market been developing recently?
Edward J. Lehner
Sam, I would characterize it this way. I think still for bigger deals, and I'll go back and just give everyone a historical perspective. I mean, you had the Metals USA Reliance transaction in 2013. You had the deal that we did in 2018 for Central Steel and wire, I think you'd be hard-pressed to really name any additional deals in the space that have been bigger than those deals. And so there's still a gap, I think, between what buyers want to pay and what sellers want to sell more. So that's in the bigger transaction. That's in the bigger, what I'll call, transformational acquisition space. But the bolt-on pipeline is still healthy.
And we're excited about what we have in our bolt-on pipeline and the opportunities that are there that we're currently working through now. We'll see which ones come to fruition. But activity within our bolt-on pipeline is good. It's robust and it's attractive given our strategy and what we're looking to accomplish over the next 5 years and beyond.
Operator
(Operator Instructions) Our next question is going to come from Alan Weber from Robotti Advisors.
Alan W. Weber
So just a quick question. In some of the presentations, you used to give a talk about projected EBITDA through the cycle and like that. Can you talk about your thoughts there, given you have ramped up the acquisition, you ramped up the CapEx and things have changed. How do you think about that today?
Edward J. Lehner
Yes, absolutely. Alan, a couple of things. So we put out our next-stage financial targets when we were at our Investor Day in New York last November. And we look at mid-cycle EBITDA within that next stage being between $350 million and $400 million. We look at those margins at mid-cycle being about 22% with that neutrality of not really having holding gains or holding losses in inventory. And then we talked about value add being up to 20% of our mix. We've certainly seen good progress on the value-add front, certainly given some of the acquisitions we made and some of the organic improvements and accomplishments that we've had within the Ryerson advanced processing segment of our business.
I would also say this, the things that we're doing in University Park in Illinois, the things that we're doing in Centralia, Washington, which is on the Oregon Washington border, what we're doing in Shelbyville, Kentucky. These -- the ERP conversions that we're doing, the systems investments that we're making. These are all very important things. They're harder, but they're really important things to getting to that next stage operating model. And we're in the kitchen right now. We're cooking that. And in the meantime, we're running our existing business. And we're doing that well. However, you've got to carry these things from early middle to the finish line, and we'll get there. And they will produce the returns that we expect, and that will get us to those next level of operating and financial targets. But it all fits together really well. There's just the work in between, and we'll do that work, and we'll get it done.
Alan W. Weber
So just kind of when you talk about the targets because, again, from November, you've made a few acquisitions. You've ramped up CapEx. Should those targets be a little higher?
Edward J. Lehner
So those targets will be a little bit higher. Yes. I mean, look, we -- it's to really where we've seen the industry be historically where we think it's going to go. Certainly, as we look at conditions right now, they are just (inaudible) countercyclical. I mean if you look at PMIs they're countercyclical. So that creates a certain to what happens as we go from countercyclical back to cyclical. But when we look at those next stage financial targets, especially at mid-cycle because we've seen a peak, right? I mean we saw a peak in 2021. We know what that peak was. It was $861 million. So we know when conditions are at what we'll call a cyclical peak. We sort of know what that looks like and what it can look like.
We also know what it looks like at the trough, depending on whether it's a pandemic or whether it's a severe manufacturing recession. We know what that looks like as well. So we set those peak -- we set those targets very thoughtfully when we did those next stage financial targets. And we believe that when we do hit those financial targets, it's going to be very good for stakeholders and for shareholders.
Alan W. Weber
And just a last question for me. When -- if you exclude auto and aerospace, but you're not as big in, how do you think about your market share, let's say, for the first half of the year?
Edward J. Lehner
Yes. I would say this. We -- market share is fluid. And so right now in the industry, market share as being overweighted the stronger end markets. So if you've got more exposure to automotive and you've got more exposure to aerospace and you've got more exposure to nonresi, market share is going to be tilted in your favor when you look at market share statistics going back to 2021, which was, I'd say, much more compatible with Ryerson's end market exposure overall. Obviously, we were the beneficiaries of that opportunity where we were able to capitalize on our higher market share in those verticals, and that helped really be a significant driver of profitability at that time.
So you get these puts and takes in this cycle. But right now, as I look at our investments, and I look at our plans moving forward, we're planning for that next upturn in the next up cycle and really have a lot of optimism and enthusiasm around what we're going to see when we come up into that next upturn and how we're going to have exposure to end markets, including penetrations into other verticals and progress in other verticals where maybe we've been lighter historically.
Operator
And if there are no further questions. At this time, I'll turn the conference back over to you guys for additional comments or closing remarks.
Edward J. Lehner
So we thank you for your continued support of and interest in Ryerson. Please stay safe and be well, and we look forward to being with all of you in November for our third quarter 2023 earnings release and conference call.
Operator
And this concludes today's call. Thank you for your participation. You may now disconnect.
