Ryerson Holding Corporation (RYZ) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Joseph T. Ryerson & Son, Incorporate First Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Jeff Horwitz, you may begin your conference.

Good morning. Thank you for joining Ryerson Holding Corporation’s first quarter 2018 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, our 2 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, 2017. You are cautioned not to place undue reliance on these forward-looking statements, which speaks 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 in our first quarter 2018 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.

Thank you, Jeff. Thank you all for joining us this morning. I want to start today by thanking our customers, as we never take your business for granted and have tremendous passion for creating great customer experiences. Next, I have to say to my Ryerson teammates, thank you for a job, brilliantly done during this year’s first quarter, as we continue to demonstrating the value and potential of Ryerson’s intelligent service center network. Our Say Yes figured out culture, led to higher year-over-year service levels and market share gains, along with higher sequential gross margins, all while using working capital more efficiently, leading to free cash flow generation of $24 million in the quarter, amidst notable material cost inflation, well done. We continue to expand our product and capability offerings, most recently, through the acquisition of Fanello Industries in early April, less broadening our portfolio of value-added services. From a financial perspective, the company grew volume at more than twice the rate of our industry as reported by the Metals Service Center Institute or MSCI. Ryerson generated profitable growth joined together with sequential gross margin expansion and expense leverage, which produced higher adjusted EBITDA, excluding LIFO compared to both the fourth quarter and first quarter of 2017. In addition to these key earnings improvements, Ryerson remains at the top of our public peers and inventory management, reducing days of supply to a multi-year low of 68 from 69 in the first quarter of 2017, generating positive cash flow despite higher inventory and receivable balances during the period, while maintaining a high service levels and continuing to provide exceptional customer experiences. Turning to the current economic environment, conditions were more favorable in the first quarter of 2018 compared to the first quarter of 2017, which can be attributed to both higher metals commodity prices and improved industrial demand conditions. U.S. trade actions in the first quarter led to a decline in metal imports into the U.S. by 9% compared to the prior year period, contributing to an increase in CRU hot-rolled carbon prices by more than 30%. Midwest aluminum prices rose by 9% and the stainless 304 surcharge rose by 5%, with still notable volatility during the period. Combined, these conditions contributed to the nearly 4% increase in Ryerson’s average selling prices, compared to the fourth quarter of 2017. From a demand perspective, the U.S. industrial economy continue to improve incrementally. Industry volume growth as measured by the MSCI increased by 2.6% in the first quarter of 2018, compared to the first quarter of 2017. Ryerson outperformed industry volume growth with North American tons sold up 5.6% compared to the prior year period. The improved demand and pricing environment, coupled with smart execution, led to higher gross margins, excluding LIFO sequentially, as average selling prices increase faster than our cost of inventory. Turning to end markets, Ryerson experienced quarterly year-over-year volume growth across all industrial sectors, most notably in metal fabrication and machine shops, commercial ground transportation, HVAC, and oil and gas. Compared to the fourth quarter of 2017, Ryerson’s end markets as measured in shipments per day also showed growth in most sectors with stronger than normal seasonal first quarter uplift. Ryerson noted relative shipment strength in the U.S. and China when evaluating market share gains year-over-year and against industry benchmarks. In early April, Ryerson acquired Fanello Industries, a privately owned metal processor and service company located in Livonia, Georgia. Fanello Industries has build an excellent reputation by designing custom metal stamping, machining, and tool and die solutions for its customers. Our passion for the customer experience is embodied in Fanello and our increased breadth of value-added services can be leveraged across our intelligence service center network to create more robust solutions for Ryerson’s current and future customers. In the second quarter of 2018, Ryerson expects to continue to see improved demand and pricing conditions. U.S. industrial production growth as measured by the Federal Reserve, increased to a five-year high of 4.4% in February of 2018 and remained elevated at 4.3% in March of 2018. Further U.S. steel capacity utilization reached a 40-month high of 77.4% in March of 2018, as domestic producers supplied a greater percentage of U.S. steel demand. Trade actions displaced imported industrial metals during the first quarter of 2018, as evidenced by a 9% reduction in metal imports, compared to the first quarter of 2017. Should be noted however, that imports have proven more resilient than predicted as April import licensing data, as measured by the U.S. Department of Commerce was higher year-over-year and sequentially. Ryerson’s strong and enduring relationships with our domestic suppliers continue to provide supply chain continuity for our customers, as we move through the second quarter of 2018. From a pricing perspective, industrial metal commodity prices continue to increase in April from March for CRU hot-rolled carbon steel, Midwest aluminum, and the stainless 304 surcharge, signaling higher average selling prices for Ryerson heading into the second quarter of 2018. With that, I’ll turn the call over to Erich, who will discuss the highlights of our first quarter 2018 performance.

Thanks, Eddie and good morning. Ryerson improved our key financial metrics as we captured the benefits of improved business conditions in the first quarter of 2018. The increased sales sequentially by 16.1%, due to 11.9% higher tons sold, exceeding Ryerson’s average seasonal improvement of 8% volume growth from the fourth quarter to the first quarter and experienced a 3.8% higher average selling price per ton. Compared to the year-ago period, revenues increased 15.6%, driven by an increase in average selling price per ton of 9.2% and higher volume of 5.8%. Gross margin improved to 17.5% for the first quarter of 2018, compared to 16.8% in the fourth quarter of 2017, but was lower than first quarter 2017 gross margin of 19.7%, due to differences in stainless steel price to cost dynamics year-over-year and carbon sheet contract price lags. Included in cost of materials sold was LIFO expense of $13.3 million for the first quarter of 2018, and $8.1 million for the fourth quarter of 2017, compared to net LIFO income of $0.7 million in the year ago period. Gross margin excluding LIFO was 18.9% in the first quarter of 2018, compared to 17.8% in the fourth quarter of 2017 and 19.6% in the first quarter of 2018. Ryerson improved our gross margins excluding LIFO by 110 basis points sequentially, with higher volumes and selling prices generating higher gross profit per ton, which improved our adjusted EBITDA excluding LIFO. Warehousing, delivery, selling, general and administrative expense increased by $11.1 million or 9.3% for the first quarter of 2018, compared to the year ago period, driven by increased shipments during the quarter. Ryerson demonstrated expense leverage, as warehousing delivery, selling, general and administrative expenses declined to 13.8% of sales in the first quarter of 2018, compared to 15% in the fourth quarter of 2017, and 14.6% in the first quarter of 2017. Net income attributable to Ryerson Holding Corporation was $10.4 million or $0.28 per diluted share for the first quarter of 2018, compared to net income of $14.8 million or $0.40 per diluted share in the first quarter of 2017. Adjusted EBITDA, excluding LIFO was $62.2 million in the first quarter of 2018, compared to $54.3 million in the year ago period. Ryerson had its strongest adjusted EBITDA excluding LIFO results since the third quarter of 2014, given our improved revenue, gross margin, and expense performance. Ryerson increased its equity to $5.2 million at March 31, 2018 from an equity deficit of $7.4 million as of December 31, 2017, a milestone for the organization as we continue to solidify our balance sheet and deleverage the business. We improved our inventory days of supply by 1 day, which stood at a multi-year low of 68 days in the first quarter of 2018, compared to the year-ago period. Ryerson maintained ample liquidity during the period, as borrowings were $366 million on our primary revolving credit facility, with additional availability of $323 million as of March 31, 2018. Including cash, marketable securities, and availability from foreign sources, Ryerson’s total liquidity increased to $381 million as of March 31, 2018, compared to $338 million as of December 31, 2017. Ryerson generated $32 million of cash from operating activities in the current period, driven by earnings and effective working capital management. Ryerson used $33 million of cash for operating activities in the first quarter of 2017. Now I’ll turn the call back over to Eddie to conclude.

Thanks, Erich. As Ryerson has continued along it’s transformational path by creating an intelligent network of interconnected service centers that provide excellent customer experiences locally, regionally, nationally and internationally, something else is a foot that deserves a mention, as we have traveled across some pretty tough macro and industry terrain these past 10 years. Ryerson today operates with 31% less net debt and legacy liabilities than it did in December of 2011. We operate today with 27% less net working capital than we did in 2011, when commodity price drivers reached the same levels. Ryerson’s gross margins excluding LIFO have continued to expand, since the Great Recession reset and the company continues to grow relative to the MSCI industry published metrics. The net book value of Ryerson’s equity turned positive for the first time in eight years, while our organization continues to get better each and every day in what we do and how we do it. That puts my Ryerson colleagues in some select company of the best kind in terms of where we are today, relative to where we were coming out of the Great Recession of 2009 and we’re only just passed the start of what we can become as an organization. With that, let’s open the call to your questions. Operator?

[Operator Instructions] Your first question comes from Brett Levy with Seelaus & Co. Your line is open.

Hey, guys. Phenomenal quarter. It’s a tough question, because it’s a consolidating industry and I think you guys are kind of prettiest girl at the dance. Do you feel like you are an acquisition target, I mean we were on the Russel Metals call, and they say that they want to expand the United States reliance, wants to expand – you guys have done everything possible, you still have a significant private equity sponsor. And I know, there’s going to be no answer to this question, but is there any reason you would resist kind of a consolidation there?

Brett, good morning this is Eddie.

Hey, Eddie great quarter. I know that has to be the hardest question I could ever ask.

Brett, you know what, I think we said this in the comments and I’ll say it again. I really like what we’re doing here and I really just tip of the cap the entire team and to our customers and really all of our stakeholders. And we got a good thing going and we’re going to keep it going. So in terms those other conversations that may take place, we’ll take when they come.

All right. And then the second question is it’s an easier one. Just talk about where you see, I mean you are big in aluminum, you are big in steel, talk about 232 and where do you see the discussions going and possible results.

Yes. Brett. The 232, I mean, look, so much of it is still at the play out. I think, there is certain themes that are emerging here and if you look at the agreement that was negotiated with Korea, South Korea, you look at the agreement that was negotiated with Argentina. It’s clear that the desire is to manage to a certain outcome around utilization rates and the industry being able to make longer-term investments to get to a better level of overall health. And so, I think there’s certain patterns that are emerging, and the way we’ve seen the 232 is, it’s certainly disrupted supply chains. I think for suppliers and/or distributors that had majority imported supply chains, they’ve probably gone through some disruption and for folks that maybe didn’t want to put forth as much working capital investment and didn’t have the right configuration of domestic supply relationship. I think it’s been tougher, certainly off the hop in first quarter. But that said, utilization rates are still 77%, so they’re not above 80%. Industry demand growth was 2.6% and inventories been really change a whole lot, so it’s hard for us to make a strong case around pre-buying. If anything, we think backlogs are being extended as customers are really trying to ramp-up and work through longer lead times for hiring and longer lead times for transportation. So demand backlogs look like they’re extending which, which is a positive. So when we look at the 232, there’s still lot of – a lot of game to be played around the 232, but clearly for folks that really depended on foreign supply chains in majority, it’s been a tougher road.

Eddie, great quarter. Thank you.

Thanks, Brett. Appreciate that.

Your next question comes from the line of Seth Rosenfeld, Jefferies. Your line is open.

Good morning and thanks for taking my questions today. To start out, I’d like to learn more about your expectations for gross margins going into Q2. You noted earlier that in this first quarter your performance clearly benefited in the low cost inventory in a rising ASP environment. How much of a catch-up in steel margin compression should we expect going into the second quarter? And then secondly, as a follow-up. When it comes historically on the SG&A side, you did see some very positive leverage there in the first quarter. Full year expectations for the coming quarters and as volumes continue to rise, is there any need for maybe a catch-up on the SG&A overhead? Thank you.

Yes, that’s feels like Rodney Dangerfield question back to school, right. So I’ll take that – I’ll take that one at a time. I’ll take those one at a time and I’ll ask the team to contribute. I think gross margins, I mean, so far so good. So far, second quarter is trending really nicely. And so, we’re still on a margin expansionary phase as we move through the year. In terms of SG&A, we’ve managed those cost pressures really well so far. But the cost pressures are there, I think they’ve been well documented around OpEx and transportation. So we’ll continue to manage those costs. Well, I think the bigger challenge and it’s a challenge and I’m very confident that we’ll meet well is, how do you feel those layers of cost off when we inflect. And when that inflection looks like it’s going to have some duration to it. So we’ve done a really good job variabilizing our costs and we’ll take on some costs as we build volume and as we build the business through the year. You know the real, the real question is, how do you peel those off when the business influx and I think we’ll do a really good job of that when the time comes. Mike and Kevin?

Hey, Eddie, this is Mike. Hi, Seth. Say on the margin piece, I think Eddie said it right, our visibility into Q2, you have to think about our business through a couple of lenses. One is looking at our book of business that will call transactional and the other is our program type business. So they both behaves slightly differently from quarter-to-quarter. Transactional really is – just more immediate as the market changes, were able to change prices on a quicker basis. And I think as we looked at Q1, with some of the news that came out towards the end of February, early March that pricing dynamic changed quite a bit and we saw some ability to pass along some middle increases as March progressed and that’s continued into Q2. Q1 on the programs side, really is like a 90-day lag of sorts, it’s based off of indexed numbers more or less that would have happened in Q4, to drive Q1 pricing. So as we look at Q2 going forward, some of those programs are resetting and it really varies by the customer and product, but generally speaking, the program business is heading in a different direction in Q2.

Seth, this is Kevin Richardson. The only thing I want to add is, you almost have to answer Brett’s question about what we anticipate for the outcome of the 232’s to understand where cost might be going. What we can’t say is that the gross margin profile was progressing and getting better through the quarter.

That’s very helpful. Thank you.

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

Hey, guys. Great quarter.

Thank you.

Really happy to see EBITDA inflicting here and most things are moving in your direction. I notice you made a small acquisition during the period. I know you’re predominantly focused on sort of deleveraging, which you did pretty nicely getting down to kind of 5 times net in the period. But you also you know – you did make a little acquisition and I just want a hear little more surrounding the rationale, was this just like too good to be true and your footprint really well or how does – how is it added up to you guys? Thank you.

Yes. So I’ll give you a framework and context, and then I’ll have Kevin append to those comments. But in terms of context, in the quarter, we did really a fantastic job in swinging operating cash flow $65 million and generating free cash flow. And whenever we have a chance, we’re always maintaining an active M&A pipeline. And the number of deals that ultimately pull through the bottom of that funnel is really small in relation to what we look at. So our criteria is really, really high in terms of how does that acquisition really dovetail into our strategy, how well it will support our strategy, and Fanello was just an outstanding bolt-on acquisition candidate that we were able to work through completing close. And they complement our strategy incredibly well, they are well managed and the valuation was reasonable. And we really like the growth characteristics of that business and we were in a position to do that, because we generated free cash flow and we continue to improve the business. And so, when we could take a swing like that and it comes through a proprietary – it comes through proprietary deal flow like this one did. You just, – you don’t refuses those opportunities? Kevin?

Yes, Sean, just a little bit more background. So Fanello is in a single location up in Livonia, Georgia which is near the South Carolina border and they’ve been a long time customer of ours, but – the company that started 20 years ago and they are big customer of ours in terms of buying metal from us, but we also know them well, because we’ve been buying fabrication services from them to support some of our large OEMs in the Southeast. So it’s a great fit, we see opportunities for future expansion and we’re really happy to have them on our team.

So this could be margin accretive, as you wouldn’t have the paying that, whatever the fee is for stamping or the value add component that you are using to sell your OEMs, you now have that in-house? Just thinking about that.

Yes, just a comment on that. When we look at these bolt-on acquisitions – this is Erich Schnaufer talking. We’re always looking at an opportunity that has value-added processing, that has gross margins, that exceed Ryerson’s consolidated gross margins overall. So all of these acquisitions have a processing capability that we don’t currently have in-house, or expanding our capabilities, as well as improving the overall gross margin profile of the business in total.

Yes, I mean the synergy case is very accretive the EVA and it’s a really excellent addition to our overall portfolio – our business portfolio.

Can you give a rough indication on what the payback on an investment like this? Is it like a one-year payback or?

You know, I’ll tell you what, we are going to leave it to where we’ve commented so far – commented so far, but as the quarters roll on, I think you’ll be able to compete that.

Great. Thank you for that. That’s very helpful. And then, just when I think about your business and maybe going back to some of the first questions you had, surrounding the sale of the business. I feel like there’s probably still more value on last year with that sort of being around 5 turns net, you’re beginning to start to generate some cash. Do you think that will continue to see improvements in that leverage as the year goes on and do you intend to continue to bring that number down?

We’ve certainly been very public in our desire, in our aspirations to bring our leverage down over time and consistent with the comments that we made both in the script and so far in the Q&A, we expect to have the optionality to do that over time. So the answer is yes.

Great, that’s it from me for now. Thank you and good luck.

Thank you.

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

Hey good morning.

Hey good morning Phil.

Good morning Phil.

Hey Eddie and Erich, how are you?

Good.

Nice. I had a question on the inventory position. Obviously, you guys doing a really good job getting that days down to 68, how should we think about that over the course of the year?

Phil, I’ll tell you what, I thought the performance was just outstanding and I think when you look at service levels going up, you look at lead times going slightly up, you look at some of the bottlenecks in the market and Ryerson’s ability to certainly gain profitable market share relative to the industry. I think it gives a window and an insight into what we’re capable of doing as an organization now as conditions are fluid in the market and we roll through the year, we said before, that this type of performance creates optionality, if we do want to make a working capital investment, we may see days go out somewhat. But as we’ve demonstrated, we can fluctuate that based on the needs of the business and opportunities that are available in the market. So I think as we go through the year and at least seasonally demand follows its traditional trajectory. I think we can maintain these type of levels unless we decide to make an investment moving through the year. And I would expect that this is a good range of structural performance for the company at this point.

No, I only asked because I think we started last year on a low point and then added a little bit which is fine, but the trend is still down. I mean, I think you guys have exhibited the fact that you’re taking the DSI down over the course of last three or four years, so just trying to think about that through the course of the year, but I think you answered it well in terms of the optionality and the fact that it’s moving in the right direction over time.

Yes, Phil, one thing I would add is, just going back in sort of trying to get comments that we made in past calls, and it certainly takes time to get to this point and realize the improvements in the business that come from efforts that start several years ago, but if you’ll remember in past calls, we mentioned that in the industry there is traditionally what I call a set of interlayer of inventory that we called dormant inventory, right. So it’s inventory that sticks around and hangs around for a long time. As we better use analytics to understand our inventory and that sedimentary layer of inventory works its way down and we’re able to make incremental investments in faster turning items again based on analytical visibility that we have now that we didn’t have four to five years ago. We’re able to invest very well, where we see better demand and not take positions in inventory that once of hanging around the business, longer than we would like.

That’s the whole dormancy situation. We have…

Yes it’s been ramping in the industry since Joe T. Ryerson is winding this pocket wash. So the more you can work that down, the more – the more you can work that down that, the better your performance is going to be.

Well that I also love the Rodney reference, was it back to school, you’re talking about?

Yes, the final exam with Sam Kinison, yes.

More action, nice. Q2 at least as of right now and April, have you – what are the demand trends you seen in April relative to Q1, maybe on a daily basis in terms of how the quarter started?

They’re better, I mean they’re better. I mean I’ll have Kevin and Mike to give you some additional color on that. But I’ll tell you the start to our second quarter was very encouraging.

Yes. Phil, this is Mike Burbach. I think as we look into Q2 from what we see and hear from our customers is the positive sentiments that we are hearing through Q1 has continued into Q2, this normal seasonality that we’ve enjoyed in years past, somewhere between 2% to 4% shipment, improvement over Q1. And we think that’s something to think about going into Q2 as well. But really the enthusiasm that Eddie expressed is really predicated around what we’re hearing across the field and from our customer base. 232 news created a lot of discussions, but it really hasn’t changed the outlook that a number of our customers are talking about, that their backlog is there and we expect Q2 to be a good quarter from a volume perspective.

Hey Phil, Kevin Richardson, the only thing I would add to that in. Eddie started in the earlier comment is the one thing that is interesting is just how tight labor markets are. So we have heard from some of our large OEM customers in particular that one of the constraints that they’ve got a work through is getting enough skilled labor in to meet the backlogs that they have. That’s obviously a high-class problem. But probably one we didn’t see come in a year ago, but so I think that’s a constraint that has to get worked through, but what Eddie and Mike just said in terms of just commentary in April relative to Q1 is just it were all aligned.

Thanks very much.

Thanks Phil.

Your next question comes from the line of Aldo Mazzaferro from Mazzaferro Research. Your line is open.

Hey, good morning.

Aldo, good morning.

I just had a couple of quick questions actually on kind of trying to break down your exposure to the market in a sense. Can you say a little bit about how much of your carbon business might reset on a CRU basis in the next quarter or two, versus the last few quarters?

Sure Aldo, I mean in general we noted in the comments or in the script that there was certainly a lag in our carbon contract pricing. So as we move through Q2 and Q3 as those averages get pulled up, we’ll get a better convergence between those averages and spot and I certainly would ask Kevin and Mike to give you some more color on that.

Yes Aldo, this is Mike Burbach. So you almost have to look at the carbon business by the type of product we’re involved. So if you’re looking at carbon flat rolled, some significant percentage of that tends to be more on the resetting of contracts and programs quarter-over-quarter as Eddie described. Some of the other products, long products tubular products tends to also have some of that, but maybe a higher concentration of spot transactional. So but I would say the biggest impact that we would see would be in carbon flat products.

Thank you. That’s really helpful. And then Eddie on the inventory comments, you’re talking about investing in working capital going down and things like that trying to hold them and on the control. I can see in the long run, how that would be strategy to kind of remove some of the dormant spending or investment but in the short run basically, what’s – your working capital raise a little bit as the market like this?

Aldo, that’s a great question. There is nothing wrong with it. And I would say that when you – so what we do as we establish relationships in the business, right. So we’ll establish relationships between coding and win rates and price and inventory and the two things that we look at really closely are service levels. And if our service levels are going down and we attribute that to maybe certain shortages or dislocations in our inventory profile, then we’re going to address that, really, really quickly. What we found is, even despite longer transportation lead times and frankly past few shipments from mills going out and becoming larger in magnitude. It just – it makes me compliment the performance of our teams and our operations teams that much more for being able to maintain, or actually increased service levels and increased shipments by the way. Increased shipments by the way at 2x – more than 2x the industry and still be able to manage to that level investment, that’s just great performance. So, we’re not, I mean certainly if we saw that our service levels were declining and if we saw that we were losing coding opportunities or we are losing order conversion opportunities. We would address that. But as I said before, this is really how you use data and this is how you use information to the benefit of the business. And I expect our capabilities in that area to continue to improve as time goes on.

Thanks, Eddie. And one final one. The way you describe the acquisition of Fanello, the vertical integration part of it, I mean it makes me think it’s almost like, you’re just extending your mix into the market. I’m wondering, are there any other big chunks of gross margin out there in terms of – if you broke down the product mix, a little bit. Could you say that there opportunities, say into two being or in one products where you could further vertically integrate like that?

Yes, Aldo. Again, really good question, thank you. I think we look more at value add. One of the things that our SG&A group has done a really good job at, is developing heat maps. And we can kind of see where the margin is in the industry and where the opportunities in the industry. So if you took 1 product category like stainless fabricated plate, you would look at those margins and say, give me, give me all of that. But the fact of the matter is, when you look at industry map, the industry is still dominated in terms of sheet products and cut to length products and slip products. And so, you have to be really smart in terms of how you look at value add, and what you bring into your portfolio, because you don’t have infinite resources. And so, I really again tip of the hat for the team for building an M&A pipeline. But also doing a great job with CapEx – growth CapEx implementation to get those ROIs and those paybacks accelerated into a market that’s certainly incrementally better than 2017 and certainly better than 2015 and 2016. So just really good execution by the team, and also good planning by the team, in terms of looking at that heat map and seen where we have opportunities and value-add.

You have hotspots in the heat map right now, and thank you.

Thanks, Aldo.

Your next question comes from the line of Matthew Fields with Bank of America Merrill Lynch. Your line is open.

Hey Eddie, here I have one question in 27 parts.

Good one.

I have a – I saw – I know you guys acquired the two businesses and they are very small and not material and everything, but why is there no cash outlay in the cash flow statement for acquisitions?

Yes, this is Erich, just getting back to you on, the two acquisitions we made last year in the first quarter. This year we acquired Fanello, right after the end of the first quarter. So there were no acquisitions in Q1 of 2018. You’ll see the cash outlay in the second quarter.

Okay, great. And then sort of cash flow working capital, balance sheet, understand all the improvements you are making on days outstanding and inventory, and it’s a constant battle, I get it. Are we going to be able to see sort of net working capital, some cash make its way to working down that ABL balance over the course of the year? What’s your priority for that in 2018?

I mean it’s – so Matthew it’s always a priority, right? So it’s always a priority. I think two things are going to happen, okay. And we saw some really good evidence of that in Q1, where we actually generated free cash flows, that’s great, okay. But if you look at averages over the last 10 years in terms of average selling prices, average monthly shipments. The other thing that’s going on right now and if you go back and you compare, you look at historical data for Ryerson, even, I would say from 2011 through 2014 for example. There is – if you look at the averages, if you look at the longer term averages, a lot of cash is getting stored in the balance sheet. And so as I say, every quarter that this goes on and we execute as well as we are. We get to bank that cash and of course, we can then decide, how much of that is going to go delever and how much of that’s going to go towards growth. But Q1 is a great example of getting some of the best of what we’re looking for, which is we get free cash flow in the quarter. And we also note that we’re storing cash above those longer-term averages and midpoints. So I think if you go back and look at a period that might be comparable to this, such as 2011 to 2014. I think you can draw some really useful inferences and insights from that.

So the average from 2011 to 2014 cash balance at year end was about $66.5 million? And I guess right, $67.7 million. So I don’t understand…

Yes, I would say, look at the reduction in net leverage though, and look at the overall cash flows that were generated in those periods, okay. I mean we would accumulate cash if we have the ability to pay down debt.

Right. Okay, and then on your 22 bonds, they are sort of callable about a year from now, but the math, I think it’s getting a little bit more compelling as an IRR play for May coil. Can you just give us a perspective on, what you think you might do with that bond issue?

Yes, we’re still looking at our bonds very closely. The May 2019, coil price is $105.5. Right now, if we did a refi early paying the make whole, net present value on that is pretty close to breakeven. I’d like to see a little bit more of an advantage before we would do something like do a make whole refinancing. But otherwise we are pretty much targeting May of 2019, as the first call date to do something what their bonds.

What I would say is, I was looking at – I was looking where a lot of issuances or trading and what the coupons are versus where they’re trading in. Given that we’re about 12 months out from our first call date, if the high-yield markets, we’re going to be a year from now, where they are today and looking at those spreads. We can only be optimistic as we head into that period, coming up on our first call date.

Okay, I would be as well. Thanks a lot guys. I appreciate it.

[Operator Instructions] our next question comes from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

Thanks very much. I just had a question for Erich, and if you had an early read on, on what we should be thinking about in terms of a LIFO expectation for Q2, because I know it tends to bounce around quite a bit?

Yes. So we’re still seeing our average cost of inventory is going up and we expected to continue to go up during the second quarter. We could see a LIFO expense as high as nearly $30 million in the second quarter.

Okay, that’s helpful. I appreciate it, thank you.

Thanks, Phil.

Thanks, Phil.

There are no further questions at this time. I turn the call back to presenters for closing remarks.

Thank you. And we appreciate your continued support and interest in Ryerson, and we really look forward to talking with you again next quarter.