Q3 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
John E. Orth; EVP of Operations; 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
Philip Ross Gibbs; Director & Equity Research Analyst; KeyBanc Capital Markets Inc., Research Division
Presentation
Operator
Good day, and welcome to the Ryerson Holding Corporation Third 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 Third 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; Mike Hamilton, our Vice President of Corporate Supply Chain; and Jorge Beristain, our Vice President of Finance 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 September 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 continued emphasis on creating and sustaining a safe and productive operating environment which is paramount to our mission of delivering great customer experiences throughout our network of intelligently connected industrial metal service centers.
I would also like to welcome Norlen Incorporated, located in central Wisconsin, to the Ryerson family of companies. Founded in 1964, Norlen is an excellent fit within Ryerson's strategy of acquiring high value-added industrial metals processors.
The third quarter of 2023 saw a continuation of counter-cyclical headwinds from the second quarter characterized by falling average selling prices and compressed margins, particularly within our stainless steel franchise.
Slowing customer demand for industrial metals, as reflected in decelerating transactional customer quoting activity and reduced OEM order sizes through the quarter, were consistent with broader macro manufacturing indicators such as metals price indexes and the purchasing managers index PMI.
I would note, however, that we are encouraged by recent inflections in HRC index pricing, manufacturing PMI, and stimulative policy announcements in China, indicating that price and demand conditions may be stabilizing as we move through the balance of the year.
Inside Ryerson, while navigating through ongoing counter-cyclical conditions, we continued making important investments on new and enhanced service centers, machinery and equipment, acquisitions, homegrown software development, and ongoing ERP conversions to build-out our next generation operating model. These investments woven together afford us the opportunity to create the best industry customer experiences within our value-added scalable network of intelligent service centers, as we work toward our next stage financial targets and desired shareholder returns. We're doing the hard stuff, but the smart stuff that creates and sustains next level capabilities and returns.
As we look ahead to the fourth quarter of 2023 and longer term, we will continue balancing the necessary management of counter-cyclical business conditions while bringing our growth and improvement initiatives to harvest.
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. In the third quarter, price trends for the commodities that underlie our product mix continue to ease. Domestic hot-rolled coil prices declined on average $70 per ton per month over the quarter as lead time shrink and steel mill capacity utilization remained low.
Similarly, prices for our Bright Metals franchise were affected by declining LME nickel and LME aluminum prices during the third quarter, contributing to margin compression. Due to pricing turbulence and sales mix, our average sales price came in slightly below our guidance range for the third quarter at $2,608 per ton or down 4% sequentially.
Turning to the demand environment. Third quarter sales volumes met guidance expectations during a period of destocking where easing conditions in our end markets were compounded by orders slowing in reaction to a period of falling prices, tighter credit conditions and a dampened economic outlook for the industrial manufacturing sector over the near-term. These macroeconomic impacts were felt across our industry during the quarter, where North American industry shipments as measured by the Metals Service Center Institute, or MSCI, declined 5% quarter-over-quarter.
Reflecting these conditions sequentially. Ryerson's volumes were lower by 3.6%, led by shipment decreases in construction equipment, food processing and agriculture and commercial ground transportation, which were partially offset by shipment increases in oil and gas and metal fabrication and machine shops.
Although, counter-cyclical industry conditions, as previously noted, continued into the third quarter and have persisted early into the fourth quarter, industry inventories are normalizing to better match demand.
Finally, I would like to say that while the current cycle characteristics have resulted in ebbing demand from our customers, we expect that our customers plan for increasing needs from emerging trends, our modernized facilities and increased capabilities are well positioned to serve them at greater speed, scale and efficiency throughout our integrated network of service centers.
As we've noted, Ryerson continues to partner with our customers for their long-term needs and we continuously look for growth opportunities to better serve our customers. In that regard, the addition of Norlen to our family of companies is a great fit for their expertise in automation and robotic manufacturing is a capability expansion to our network.
As we noted last quarter, our value-add percent of sales has increased to 18%, growing from approximately 14% a year ago, and we reiterate that our target of at least 20%, which is expected to translate to higher and more durable margins through the cycle.
And with that, I will turn the call over to Jim for third quarter financial highlights as well as our fourth quarter outlook.
James J. Claussen
Thanks, Mike, and good morning, everyone. Before discussing guidance for the fourth quarter, I would like to highlight the drivers for our third quarter performance compared to our guidance expectations.
During the period, we met our guidance range for adjusted EBITDA, excluding LIFO, exceeding our guidance on earnings per share, generated positive cash flow, decreased net debt while also maintaining our net leverage ratio within range, and return cash to shareholders through dividends and share repurchases, while continuing to execute our organic and acquisition growth investments.
Facing an environment of easing prices and softer demand, we reported adjusted EBITDA excluding LIFO of $45 million, which came in within our guidance range of $43 million to $47 million, while our earnings per share of $1 was notably higher than our guidance range of $0.31 to $0.43 per share. The beat on earnings per share was driven largely by the LIFO income recognized over the quarter, which also benefited gross margins.
Looking to the fourth quarter of 2023, we expect volumes to be down sequentially compared to the third quarter, in line with normal seasonality. As such, we expect fourth quarter revenues to be in the range of $1 billion to $1.15 billion, with average selling prices down 3% to 5%.
Based on these expectations, we forecast adjusted EBITDA for the fourth quarter of 2023, excluding LIFO, in the range of $28 million to $32 million, and earnings in the range of $0.18 to $0.22 per diluted share. We expect LIFO income of approximately $8 million to $12 million.
In the third quarter, we generated $79 million of cash flow from our operations, which included a $15 million release from lower working capital requirements. We ended the period with $366 million of total debt and $329 million of net debt.
Ryerson's net leverage ratio remained stable quarter-over-quarter at 1.4x, and remains within our leverage target range, while the company's available global liquidity remains robust at $807 million. Benefiting from a healthy balance sheet, we remain focused on investing back in our business through the cycle.
Capital expenditures were $22 million in the third quarter. This amount comprises both maintenance and growth projects, including service center modernizations. We're very excited about the modernization effort 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 $10 million in the quarter, which was comprised of $6 million in dividends and $4 million in share repurchases. We paid a quarterly dividend of $0.1825 per share, and have announced a fourth quarter cash dividend of $0.1850 per share, an increase of 1.4%, our ninth consecutive raise.
As for share repurchases, after repurchasing $4 million in shares in the open market, we currently have approximately $46 million remaining on our $100 million authorization, which has a term until April of 2025. As part of the capital allocation policy highlighted in our next phase targets, we will continue to prudently evaluate our shareholder return opportunities, as well as our overall capital allocation strategy to maximize long-term shareholder value.
With that, I'll turn the call over to Molly to provide further detail on our third quarter financial results.
Molly D. Kannan
Thank you, Jim, and good morning, everyone. In the third quarter of 2023, Ryerson reported net sales of $1.2 billion, which was 7% lower sequentially, driven by roughly an equal split of lower volume and lower average selling prices. In the same period, gross margin of 20% was an expansion of 60 basis points versus the previous quarter. Excluding LIFO, gross margin fell 140 basis points in the second quarter to 17.3%, as average selling prices for our bright metal sales mix decreased faster than cost of goods sold.
On the expense side, warehousing, delivery, selling, general and administrative expenses decreased 5% sequentially to $193 million, driven by lower variable expenses, lower accruals for personnel, and lower professional fees, partially offset by higher reorganization expenses related to systems implementation and start-up costs associated with the University Park Service Center.
For the third quarter of 2023, net income attributable to Ryerson was $35 million, or $1 per diluted share, compared to a net income of $37.6 million and diluted earnings per share of $1.06 in the prior quarter.
Finally, Ryerson achieved adjusted EBITDA, including LIFO of $45 million in the third quarter of 2023, which compares to $70 million in the prior quarter. Free cash flow generation was $57 million this quarter, and compares to $69 million in the prior quarter period, driven by operating earnings, as well as working capital relief.
In the first 9 months of 2023, Ryerson has generated $205 million in adjusted EBITDA, excluding LIFO, and $179 million in free cash flow.
And with this, I'll turn the call back to Eddie.
Edward J. Lehner
Thank you, Molly. During the third quarter, we navigated counter cyclical conditions well, and expect a flattening of these conditions, as we move through the balance of the year, reflecting familiar holiday seasonality. As we firmly believe, metals are the perennial materials enabling both the remedial and transformative manufacturing and building required to meet the formidable challenges of these times while improving the human experience and quality of life for the greatest number of people.
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-add, and consistency, position Ryerson and its stakeholders well for an enduring and valuable future as these secular trends play out in the years ahead.
With that, we look forward to your questions. Operator?
Question and Answer Session
Operator
We'll now take our first question from Katja Jancic with BMO Capital Markets.
Katja Jancic
First, on the Norlen acquisition, can you provide a little more information on what the EBITDA and margins in that business are?
Edward J. Lehner
Happy Halloween. We don't usually disclose and break out (technical difficulty) on acquisition margins. Our top line, suffice to say that the fabrication margins in a business like (technical difficulty) for EBITDA margins are more than (technical difficulty) at mid-cycle, and the revenue at Norlen is comparable to the average service center size in the industry, which is between $25 and $35 million.
Katja Jancic
Okay. And then given that the environment currently is a bit more challenging, how does the acquisition pipeline look like? Is there a potential for increase in M&A activity over the next few months?
Edward J. Lehner
The bolt-on M&A pipeline is really good. It's stocked. We have a lot of really good opportunities that we're evaluating. And so we're bullish on our business development pipeline.
Katja Jancic
And maybe just one more, if I may. On the CapEx heading into next year, I understand it's still early, but how should we think about it?
Edward J. Lehner
Yes. I'll go ahead and turn it over to Jim for a little more detail, but we look at it in terms of 3 buckets. What's our current maintenance CapEx? What are the big projects that we're doing that we need to finish, such as University Park and Shelbyville, for example? And then how much growth CapEx around the rest of the network? So, Jim, do you want to provide some additional detail?
James J. Claussen
Yes. What I would say is for the balance of this year, our expectation is still in that $125 million range for CapEx spend. And then in this quarter, we're currently working through our CapEx plans for 2024 and the next couple of years. So we'll be able to talk more to a direct number in February.
Operator
Well, now I'll take our next question from -- I apologize -- we'll take our next question from Phil Gibbs with KeyBanc Capital Markets.
Philip Ross Gibbs
Jim, can you talk a bit about the end markets, specifically what you're seeing in Class 8, energy, HVAC, and general durables?
Edward J. Lehner
Mike, do you want to take that one?
Michael J. Burbach
Yes, sure.
Philip Ross Gibbs
Jim, you can talk about whatever you want.
James J. Claussen
Yes.
Edward J. Lehner
I want to know what the kids are dressing up for -- what are the kids dressing up for Halloween, Phil? That's what I want to know.
Michael J. Burbach
Yes. We'll have that chat afterwards, Eddie. You know, different activities going on in the various markets, as you probably well know. Specifically, you asked about Class 8, I would say, 2023 has been an up year for Class 8 in general compared to 2022. And it looks like that activity level that we're experiencing short-term here might lead into first part of next year. But forecast from the industry would indicate there's going to be a downturn sometime, maybe second, third quarter for the balance of 2024.
We're watching that very carefully, listening to customers. There's a variety of opinions besides what the industry is publishing. So we stay close to it. But so far this year, it's been fairly strong and in the near term appears to remain that way.
As far as oil and gas, we saw an uptick in Q3 compared to Q2. We also saw a year-over-year uptick. You know, when I look at oil and gas and really our involvement in it, it's not our largest end market in the sense compared to, say, Class 8 and some of the others, but it's the business we've been enjoying, largely driven by well completions, and it's all about speed and service. We've got some great inventories, well-positioned, and really it's a game of speed to get back to customers quickly and effectively and make sure that we've got the right products at the right place at the right price. So we enjoy the business, and the outlook right now is pretty much more of the same on a go-forward basis.
And then you mentioned HVAC, sort of a mixed bag there. The customers are probably supplying more of the housing-related activities, maybe are having some tougher times than the ones that might be going on, some non-res construction. So that all adds up to something that's maybe down year-over-year compared to what we had last year, and the outlook is a little fuzzy there with interest rates high and the housing starts still at a slow level.
So near-term, more of the same, but long-term, I think it's a function of non-res construction trends as well as housing starts.
Edward J. Lehner
You know, Phil, I would add this to Mike's answer. I would say that with the exception of, say, aerospace and automotive, which even though it looks like the strike is in the process of getting settled, but with certain end markets being relatively stronger, the general demand environment has been a buyer's market. So you see smaller quoting opportunities, you see less quoting opportunities.
Certainly been encouraged. You kind of -- you have to take the data points as they come these days, certainly been encouraged by industry inventories, the level of those inventories, recent price increases, stabilization even around, I'd say, stainless pricing components. Aluminum is, I'd say, neutral to trending better. Carbon, of course, has really trended higher over the last 6 weeks. PMIs look like they're trending up a little bit. It could be a restocking environment as we move into Q1 and next year, or it could be better than that. But current indicators have been encouraging, but certainly still experiencing lagging countercyclical effects and now seasonal slowness as we move to the balance of the year.
Philip Ross Gibbs
Hey, Eddie, do you have an update on the project in Chicago and timing-wise, when does it start? Where are you through the process?
Edward J. Lehner
Yes. So equipment is being installed, racks are up, some limited production is taking place in the value-add arena in long products processing. We should be fully operational in University Park by early April of 2024. It's a big undertaking. As I referenced in the script, I mean hard stuff, but smart stuff. I mean, these things will ultimately make a big positive difference as we look to see our earnings stream become more consistent and higher through the cycle. But I'll ask John Orth to maybe provide some additional detail on University Park.
John E. Orth
Thank you, Eddie and Phil. With regards to the investment at University Park, the work on the value-add side is actually ahead of schedule. And as Eddie mentioned, we are actually doing limited production now on the long product BA side. And our teams are really focused on bringing the automation to drive safety and productivity fully up to speed, and we absolutely see a clear runway to be fully operational in April of next year
Philip Ross Gibbs
And then a couple of questions, just one on net working capital and one on pension. What are you anticipating for net working capital in the fourth quarter? Because I know you did take some of the inventories down this quarter, which was a nice tailwind. But as you said, incomings are starting to stabilize -- and then on the pension, I know rates have been climbing, which helps the liability, but the outcome of the re-measurement will depend on the mix of bonds and equities in the portfolio. So how does that potentially shape up if we just look at it as is today, meaning if we mark-to-market the pension and OPEB today?
Edward J. Lehner
Yes, sure. So I'll kick it to Jim in just a second. I'll give you some broader-based color on the question. Net working capital is going to come down. I think with some of the better news that's occurred recently, it also means lead times are going to get stretched out. We know the mills are still struggling with on-time delivery issues on a mill-by-mill basis. So that's sort of a built in, I would say, that's a built-in regulator of how fast you can build inventories even if you want to get a little bit long and you want to improve the quality of your inventory.
So I mean, just given where our guidance is net working capital should come down. And we're doing some good work around the pension and our legacy liabilities at present. So, I'll take it over to Jim, and he can give you a little bit more detail on -- with respect to those questions.
James J. Claussen
Yes. Thanks, Eddie. I think Phil, I think Eddie pretty much covered the working capital question. The only thing I would append on to that is as -- with less shipping days in Q4, we'd also expect our nominal AR balance to fall a little bit as our weather day sales outstanding are fairly consistent.
On the pension front, certainly, obviously, the re-measurement will occur at the end of the year with discount rates and asset returns taken into account. What I would say is we have gone through very thoughtful exercises in the past several years with either annuitizations to de-risk the plan or some lump-sum payouts in order to take that liability down far lower than it was historically, and we'll continue to do that work.
Operator
(Operator Instructions) We'll now take a question from Alan Weber with Robotti Advisors.
Alan W. Weber
So can you talk about the ERP kind of 2 things, well, maybe 3. What you hope -- when it will be complete, what you hope it accomplishes? And then where it fits in as you've often talked about customer service?
Edward J. Lehner
Yes, absolutely. So I'm a Browns fan, so I'm perpetually hopeful. ERP is difficult, Alan. It's just as difficult when you finally make the decision. We made the decision at the right time. We finally had to make that call. I mean, before COVID, we had done ERP conversions maybe one at a time, slowly getting to a common ERP environment on SAP. And there's always puts and takes when you do that. You definitely take hits in the short term. There's no question about it.
But if you want to engineer your way towards your strategic objectives, especially around the customer experience, and you want to digitalize your network, you really need to have that uniform platform so you're not constantly developing in 2 to 3 to 4 different environments. And there's a lot of other costs you have to carry when you do that. So, you really want to have a congruent and uniform master data environment, which really allows you to offer next level services to your customers very quickly, very efficiently, in a way that you should be able to garner repeat business when it's done.
So, it's a big undertaking. It's a big investment. But ultimately, it's an investment you have to do if you want to elevate yourself to the next level when it comes to things that we've talked about before, such as -- our e-commerce capabilities, our ability to quote really fast, our ability to develop AI use cases, which we have a couple in development for example.
So there's no way you can get around it. You just have to do it. And it's not easy, but the rewards are there on the other side as you begin to assimilate that, digest that. And then you can develop, again on that one uniform platform that runs your business transactionally, by the second, by the hour, by the day, so on and so forth.
Alan W. Weber
So I guess, it's still unclear though, and I realize it's one of these things where you're never fully done, I guess in some ways, but when do you really start to see, you know, kind of the benefits of the investment?
Edward J. Lehner
You see the benefits of the investment, usually I would say, it takes, from the time that the conversion is finished, it usually takes 6 to 9 months before the business unit that's converting really learns the rules and the controls of this system and how to use it, especially when they've been -- when they've been transacting in a legacy environment for a long time. So it's usually 6 to 9 months. We have one of our biggest multi-markets is in the process of converting now. We've got a couple smaller divisions that are going to convert in the first quarter of next year. Then we're going to take a nice long pause and we're going to settle in.
And I believe at that point in time, once we get past Q1 of 2024, we're going to start to see good returns from our investment as we move through the balance of the year, depending on the macro, of course, but I think that really helps our self-help initiatives going forward.
Operator
And it appears there are no further telephone questions. I'd like to turn the conference back to our presenters for any additional or closing comments.
Edward J. Lehner
Wishing everyone a safe, healthy, and enjoyable holiday season. We look forward to being with all of you in the New Year to discuss Q4 and full year 2023 results. Take care. Thank you.
Operator
And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.
