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Ryerson Holding (RYI) Q1 2019 Earnings Call Transcript

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Ryerson Holding (NYSE: RYI)
Q1 2019 Earnings Call
May. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome, everyone, to the Ryerson's first-quarter 2019 earnings webcast and conference call. [Operator instructions] Jeff Horwitz, with Ryerson Investor Relations, you may begin your conference.

Jeff Horwitz -- Investor Relations

Good morning. Thank you for joining Ryerson Holding Corporation's first-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 and Mike Burbach are two North American regional presidents, who 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.

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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 these non-GAAP financial measures discussed on today's call for the most directly comparable GAAP measures is provided in our first-quarter 2019 earnings release filed on Form 8-K yesterday, which is available on the Investor Relations section of our website. I'll now turn the call over to Eddie.

Eddie Lehner -- President and Chief Executive Officer

Thank you, Jeff. And thank you all for joining us this morning. First, thank you to our customers. We never take for granted the opportunity to earn your business.

Our mission and purpose are to create exceptional customer experiences with sunrise-type consistently. Next, thank you to my Ryerson and CS&W colleagues for an outstanding start to the year. Ryerson grew net income and market share while realizing expense leverage maintaining the industry-leading asset efficiency resulting in strong earnings per share and higher adjusted EBITDA, excluding LIFO, in the first quarter of 2019. We accomplished this despite well-documented disruptive winter weather conditions, falling commodity prices and rising average inventory costs, which compressed margins through the first quarter.

We continue to successfully integrate our recent acquisition of Central Steel & Wire into Ryerson, which has provided substantial product mix and service coverage benefits. Further, our investments in digitalization continue to enhance our ability to map industry supply chains, which enable our talented and experienced teammates to provide ever-better solutions to our customers with speed, scale and expanded capabilities. Our strategic plan and business model are creating intrinsic improvements in Ryerson for continued value accretion for our stakeholders that is becoming increasingly evident in our financial statements. To measure our progress, we set financial targets first outlined in our fourth quarter 2018 earnings call.

These targets are centered on profitable market share growth, margin expansion, asset efficiency, expense management and free cash flow generation. Our three-year next phase targets are available on the investor relations section of our website. We continue to enhance our reporting on our key business drivers in our quarterly earnings presentations to provide clarity on our progress toward these next phase targets each quarter. In short, over the next three years, we expect to meaningfully reduce debt and legacy liabilities while increasing free cash flow less driving shareholder value accretion.

Turning to the current economic environment. Industrial metal price declines slowed in the first quarter of 2019 after a speed fall in the second half of 2018. Spot prices appeared to be dripping lower for carbon, steel and aluminum while the stainless surcharge rose from January through March before moderating in April. Overall, the current pricing environment is softening with spot commodity prices falling over the past two weeks.

Most of this can be seen through the lens of narrowing spreads between the international and domestic tons, short domestic mill lead times and well supplied industrial metals markets. Industry demand conditions eased in the first quarter of 2019 compared to the prior year as evidenced by a 6.4% year-over-year decline in shipments as measured by the Metals Service Center Institute or MSCI. At the same time, Ryerson's same-store ton shipped, which excludes Central Steel & Wire, were only down 0.6%. Further, the demand outlook appears to be stable as we move through the second quarter of 2019 supported by macro indicators, which show continued manufacturing expansion and affirming customer sentiment.

What remains to be seen is how and when inventory destocking shifts to inventory restocking as we move through the remainder of 2019. Turning more specifically to end markets. In the first quarter of 2019, compared to the first quarter of 2018, Ryerson experienced slightly lower shipments on a same-store basis in several end markets, most notably in food and agricultural equipment and oil and gas sectors. Metal fabrication and machine shop and commercial ground transportation sectors were the strongest performing end markets with volume growth in the first quarter on a same-store year-over-year basis.

Central Steel & Wire continue to enhance Ryerson's commercial processing and operational capabilities during the first quarter of 2019 with net sales of $172.2 million and $3.4 million of adjusted EBITDA excluding LIFO. As part of Ryerson's post-close optimization plan, CS&W realized approximately $22 million of expense savings on an annualized basis since the acquisition from supply chain and operational expense synergies. Further, Ryerson realized approximately $12 million of cumulative proceeds since the acquisition from real estate sales for operations that were assimilated into existing facilities. CS&W's improved working capital management has decreased inventory days of supply from 115 days in the fourth quarter of 2018 to 94 days in the first quarter of 2019 while improving on-time delivery metrics.

CS&W experienced peak margin compression in the first quarter of 2019 given its longer inventory holding period compared to other Ryerson facilities, and management anticipates stronger margins and EBITDA results in the second quarter of 2019. CS&W's financial performance is ahead of schedule so far. As we continue to drive toward our three-year midcycle objective of $600 million in revenue and $50 million in adjusted EBITDA excluding LIFO. Looking ahead to the second quarter of 2019.

Our base case sees customer demand sentiment as stable in most of our key end markets. We anticipate average selling prices to be 1% to 3% lower sequentially as bellwether price drivers drift to the low side of their expected in-year ranges. Further, we expect gross margin excluding LIFO recovering expansion of approximately 30 to 50 basis points as we move through the second quarter driven by average inventory costs falling at a greater rate than average selling prices. Based on these expectations, Ryerson management currently anticipates earnings per diluted share in the range of $0.77 to $0.87 for the second quarter of 2019 and adjusted EBITDA, excluding LIFO, to be in the range of $64 million to $68 million.

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

Erich Schnaufer -- Chief Financial Officer

Thanks, Eddie, and good morning. In the first quarter of 2019, Ryerson achieved revenues of $1.23 billion, an increase of 30.8% compared to $941 million in the first quarter of 2018 with tons shipped 17.7% higher and average selling prices 11.1% higher. On a same-store basis, revenues for the quarter were $1.06 billion, an increase of 12.5% year over year with average selling prices 13.1% higher and tons shipped down 0.6%. Ryerson gained market share during the first quarter of 2019 as North American volumes contracted 6.4% year over year according to the MSCI.

Gross margin excluding LIFO and purchase accounting adjustments was 17.2% in the first quarter of 2019 compared to 18.9% in the first quarter of 2018 and 17.5% in the fourth quarter of 2018. Gross margins, excluding LIFO, declined on a year over year and sequential basis primarily due to the decline in commodity prices experienced in the second half of 2018 and first quarter of 2019 as the supply side response was ample relative to demand. Warehousing delivery, selling, general and administrative expense increased by $33.2 million or 25.4% in the first quarter of 2019 compared to the year ago period, primarily driven by the acquisition of Central Steel & Wire. On a same-store basis, expenses increased by $2.2 million or 1.7% compared to the first quarter of 2018.

Warehousing, delivery, selling, general and administrative expenses, as a percentage of sales, declined to 13.3% in the first quarter of 2019 or 12.5% on a same-store basis compared to 13.8% in the first quarter of 2018, demonstrating the company's ability to realize expense leverage at higher volumes. Net income attributable to Ryerson Holding Corporation was $29.5 million or $0.78 per diluted share in the first quarter of 2019 compared to $10.4 million or $0.28 per diluted share in the prior year period. Ryerson achieved adjusted EBITDA excluding LIFO of $63 million in the first quarter of 2019, an increase of $0.8 million compared to the same quarter last year. Turning to the balance sheet.

Ryerson's inventory balance stood at 75 days of supply in the first quarter of 2019 or 72 days on a same-store basis compared to 82 days in the fourth quarter of 2018. Our inventory on hand was within our target range of 70 to 75 days, even as Ryerson restocked inventory during the quarter. Ryerson's positive book value of equity grew from $75.9 million as of December 31, 2018, to $112.8 million as of March 31, 2019. Our higher equity value in the first quarter of 2019 was the product of improved operating performance during the period.

Cash used in operating activities was $18.5 million for the first quarter of 2019 compared to cash provided by operating activities of $31.7 million in the year ago period, driven primarily by our targeted inventory restocking, partially offset by strong net income generation. Ryerson expects to generate cash from operating activities each quarter for the remainder of 2019 given our current view of gradual and moderate counter cyclicality for the balance of the year. We maintained ample liquidity throughout the quarter. As of March 31, 2019, borrowings were $558 million on our primary revolving credit facility with additional availability of $411 million.

Including cash, marketable securities and availability from foreign sources, Ryerson's total liquidity increased to $460 million as of March 31, 2019 compared to $381 million as of March 31, 2018. Capital expenditures were $11.3 million in the first quarter of 2019 compared to $7.6 million in the prior year period. Ryerson also received net proceeds from the sale of property, plant and equipment of $8.5 million in the first quarter of 2019, driven by the sale of our CS&W Milwaukee facility, which was consolidated into our existing Ryerson footprint. As noted on our fourth-quarter 2018 earnings call, Ryerson repurchased $11.6 million of our 11% senior secured notes in January 2019, reducing annualized cash interest payments by approximately $0.8 million.

This further underscores our commitment to reducing our long-term debt leverage while maintaining sufficient liquidity to promote growth and manage through any market conditions. Now I'll turn the call back over to Eddie to conclude.

Eddie Lehner -- President and Chief Executive Officer

Thanks, Erich. Our performance in the first quarter of 2019 continues to showcase our progress as we improve the customer experience at speed and scale with better product, processing and service capabilities. Our progress has moved well beyond cyclical and transitory oscillations as we generate better through the cycle results at higher structural run rates of revenue and earnings, thus enabling further debt and legacy liability reductions on a go-forward basis. With that, let's open the call to your questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Martin Englert with Jefferies. Your line is open.

Martin Englert -- Jefferies -- Analyst

Good morning, everyone. So you've called out some customer inventory destocking in volumes for the company that are likely comparable quarter on quarter. Can you provide any additional detail on where end users may be at their destocking cycle? And any guess on where real underlying demand trends are excluding this?

Eddie Lehner -- President and Chief Executive Officer

Sure, Martin. I'm going to have Mike and Kevin take the first cut at that, and then I'll come in for the big finish.

Mike Burbach -- President of North-West Region

Mark, this is Mike Burbach. So when we talk about this, we listen to our customers, we were trying to manage our inventories to meet their needs heading into Q2. And I wouldn't say that it's widely out of source at the moment, but there has been gradual builds from different customers, not necessarily isolated to any one end market. So we think there's an opportunity heading forward as they destock and get back to adding production that's going to be going out the door of their facilities that should be good for the business.

Our view on Q1 was the industry was down 6.4% compared to the same time last year. But Ryerson really only realized less than 1% down and a lot of that had to do with the way we go to market these days, focused on the customer, really put a lot of emphasis on customer care, speed the service and making sure we have the right inventory for right places. So I think we're in a good position to continue to take care of the customers and hopefully, they'll continue to reward us with business.

Kevin Richardson -- President of North-West Region

Martin, this is Kevin Richardson. Just one thing I would add there. If you look at last year in terms of the comps and the MSCI shipments, last year, obviously, was a very unusual time for our industry. This time last year, there was a lot of uncertainty around tariffs in terms of what countries, how much of those tariffs would be, would it lead to quotas? And there is no doubt that there was prebuying that was going on in terms of people trying to put themselves in the inventory position.

You enter this year, supply chains have settled out, prices were falling and there's some destocking. So I think it's going to take some time to settle out. But we also look and pay attention to the inputs of what's happening in the big picture and labor markets are still tight. PMI is still above 50.

GDP has been a pretty good print. So all in all, demand feels pretty good, but the year-over-year comps from MSCI were a little surprising, but I think you got to put context around that.

Eddie Lehner -- President and Chief Executive Officer

Martin, this is Eddie. So our coating activity in Q1 was still very strong. And we really only saw a pause in coating activity around the Easter holiday. We lost some days with weather, which I think has been pretty well covered by now.

So demand conditions were still on balance, they were good. It seems right now we're syncing with the overall data, which shows PMI coming down a little bit, industrial production coming down a little bit. And there's really two schools of thought at this point: one is, it's a gradual reset; through the year, prices fall and demand is stable and maybe in the second half is down a couple of points. But we think it's the other one.

We think this is a pause in Q2. So the inventory hangover that works itself out and our base case is that the second half of the year could see a nice recovery.

Martin Englert -- Jefferies -- Analyst

OK. And just looking back at history, I guess how often have you seen the scenario play out? Where you have a recovery from a demand perspective in the back half of the year versus the first half of the year.

Eddie Lehner -- President and Chief Executive Officer

Well, I mean, it's relative, right? So there's a typical seasonality in first half versus second half in terms of shipments. We just think that the second half of this year that, that difference may narrow coming off of the Q2 that might be a little bit, say, paused looking at some of the data and looking what's going on in the business. So it will be on a relative basis. It will be a better second half.

And I think we saw that in the second half of 2016, for example, in 2017 -- going into 2017, oil and gas recovered, for example. So I would say the second half of 2016 was one way or the second half was better than we would've anticipated.

Martin Englert -- Jefferies -- Analyst

OK. Excellent. Thank you for all the color there. And one last one if I could.

During the first quarter, company's FIFO gross profits were about $341 per ton with ASPs down over $20 per ton quarter on quarter. Any sense on where the underlying profitability is excluding this inventory holding loss due to the metals price volatility?

Eddie Lehner -- President and Chief Executive Officer

Yes. So our intrinsic gross margin target right now is right at 19%. So we would -- we -- internally, we would look at our inventory holding losses as the delta between 19% and 17.2%.

Martin Englert -- Jefferies -- Analyst

OK. Thank you for the added detail and congratulations on the results.

Eddie Lehner -- President and Chief Executive Officer

Thanks, Martin. Appreciate that.

Operator

[Operator instructions] Your next question comes from the line of Phil Gibbs with KeyBanc. Your line is open.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Good morning. Eddie, the integration of Central looks to be going well. What should we expect in terms of what's on tap? It sounds like you've reduced some of the footprint, you've sold an asset or two. What are the next stages of integration as you see it?

Eddie Lehner -- President and Chief Executive Officer

Sure, Phil, thanks. And I appreciate the good mojo. So Jim Claussen is with us. He's our president of CS&W.

So he is with us today on the call. So I'm going to kick it over to him in just a moment. I would say that the team's done a really great job. We've actually found that we can carry out the post-close synergy plan while enhancing the brand of CS&W, which is a real plus for us.

So this acquisition is turning out very well. We expect it will continue to go well. And I'll let Jim to give you some more color on that in terms of next stage priorities and where we think we're going.

Jim Claussen -- President of CS&W

Yes, Phil. Thanks, Eddie. We really continue to work our synergy model, as Eddie said. And the big steps for us is to continue to improve the inventory position through the cycle, lower the days of supply, but having the right inventory for the customers where they need it.

We've been able to leverage the Ryerson network to put inventory closer to customers as the geographic coverage is brighter for Ryerson. So that's been a nice synergy. And really Mike hit on it, it's all about servicing the customer. So continuing to focus on our service metrics and work inventory supply into a better spot.

Eddie Lehner -- President and Chief Executive Officer

Yes. And just to finish up on that and Mike Burbach or Kevin may have some color on this as well. But if you look at where expense to sales has gone, the team's done a really nice job of getting from really 21%, 22% down to 18%. Inventory days are just a shade under 90 now versus more than 120 when we closed.

And so a lot of the things that we want to have happened or happening are just happening faster with a better magnitude. The cross-pollination between the two companies, their product mixes have turned out to be very complementary. There is a lot of business, a lot of bidirectional business, it's going back and forth to fill in product gaps and really get town the time interval within which you can fulfill an order. So if you're quoting five days on a product, for example, for a pretty significant amount of our product mix, particularly in long tube, instead of quoting five days to get it to a customer, it's much easier for us to quote 2 days or 3 days.

So we think that's making a positive difference as well. And I would kick it over to Mike and Kevin, if they have any additional color.

Mike Burbach -- President of North-West Region

Yes. Thanks Eddie and Phil. This is Mike Burbach. So I think the guys covered it pretty good.

But the way I think about this is we're off to a great start. I think the results for the first nine months or so that we have been -- and I guess, close -- yes, nine months. We're really pleased with where we are, but we still see a lot of opportunity here to leverage the two companies' strengths. The products and strengths of each company really are quite complementary and we've done a nice job getting started to use that and make sure that we're able to take advantage of that for our customers.

But like a lot of things when you start off with two different companies, with two different systems and whatnot, we can continue to refine that process and make sure that we're getting faster and stronger and more reliable. So I'm excited when I think about from a Ryerson perspective to offer the Ryerson customers some of the strengths that Central has to offer. And I know the Central customers are going to see the same thing from Ryerson. So really it's a nice story and off to a good start.

But I think the good stuff is still to come.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks. Thanks so much for for everyone's perspective there. Eddie, just in terms of macro or micro, I guess, if you're looking regionally or broadly, but over the last, call it, four o six weeks of switches, flips in terms of that some weakness we've seen and hot rolled specifically and obviously that's a bellwether in the market. And just curious in terms of what you isolate that to in terms of the causes of that and whether or not you think the move down and scrap here earlier in the year surprised you?

Eddie Lehner -- President and Chief Executive Officer

So that's a great question. And I know how closely you follow it. I mean if you look at scrap loads, domestic versus international, the export market for scrap certainly hasn't been as strong and we understand that and scrap looks like it's going to fall $20 to $30 in May. And a hot band will get tugged down with it.

If you look at the juxtaposition of that internationally with iron ore going up and especially high-quality iron ore going up for all the reasons that, that has again been well-documented, there's a tension that's developing now where there's really not much of an import market for HRC. So it's really a domestic story for new capacity that's come online. And some of the bigger users of HRC, whether it's construction or O&G, those end markets aren't off to a particularly strong start in the first three, four months of the year, but I think it will pick up. So we see a floor forming for HRC.

We don't think it has much further to fall. I mean there will be kind of a dead cat oscillation, I would say, and then it looks to rebound in Q3, stabilize and move a little bit higher. So we're not doom and gloom on HRC at this point. And we think most of the commodities are going to find a range and even move a little bit higher in the second half of the year.

So it's not going to be extreme. It's not going to extreme down, it's not going to be extreme up, but we think we'd find a bottom, find a range of support across aluminum, nickel, chrome and, of course, the carbon drivers and then we think it goes a little bit higher in the second half of the year. Before you get to November, December, which always requires its own assessment.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Yes. Thank you.

Operator

There are no further questions in queue at this time. I'll turn the conference back over to our presenters.

Eddie Lehner -- President and Chief Executive Officer

We appreciate your interest in Ryerson. I want to thank the team again for an excellent quarter in Q1 and we look forward to speaking with you next quarter.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Jeff Horwitz -- Investor Relations

Eddie Lehner -- President and Chief Executive Officer

Erich Schnaufer -- Chief Financial Officer

Martin Englert -- Jefferies -- Analyst

Mike Burbach -- President of North-West Region

Kevin Richardson -- President of North-West Region

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Jim Claussen -- President of CS&W

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