Ryerson Holding Corporation (RYZ) Q4 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Ryerson Holding Corporation's Fourth Quarter 2022 Conference Call. Today's conference is being recorded. [Operator Instructions]. I would like to turn the conference over to Jorge Beristain, Vice President of the Finance at Ryerson. Please go ahead, sir.

Good morning. Thank you for joining Ryerson Holding Corporation's Fourth Quarter and Full Year 2022 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 that could cause actual results to differ materially from those implied by the forward-looking statements and 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, 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 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.

Thank you, Jorge, and thank you all for joining us this morning. As we reflect on the fourth quarter and full year 2022 results, I want to start by expressing my heartfelt appreciation to our 4,200-plus strong Ryerson team for their hard work and continued dedication, which now includes new businesses added to Ryerson's family of companies in Ford Tool Steels, Apogee Fabrication, Howard Precision Metals and Excelsior Metals as well as our first additive manufacturing investment in FreeFORM Technologies. Our team is integral to our mission to deliver great customer experiences, which we provide through our network of intelligently connected industrial metal service centers. Industrial metals are recyclable, reusable and sustainable enablers essential to shaping the world around us and paving the way for the required advances in the human experience, living conditions and well-being. The fourth quarter was a period of rolling headwinds and reemerging tailwinds as we saw a continuation of the countercyclical environment for most of the quarter. However, prices for the metals commodities in our product mix started to find support in November and have continued to see steady increases into the first quarter of 2023. Domestically, we saw volumes experience familiar seasonality via slowdowns in industrial purchasing as well as distortions requiring rebalancing that had accumulated earlier in the year, particularly with respect to stainless steel and carbon steel. While the pricing and demand landscape still obeys the laws of general cyclicality, I would note the more important changes in Ryerson's atmospherics as well as those pertaining to industrial metals, which support our optimism about our company and industry. During 2022, we set the stage for Ryerson's future and displayed that we are a much stronger company through the cycle as we saw higher highs as well as higher lows during a period of heightened volatility catalyzed by ongoing pandemic and geopolitical distortions. While this was another transformational year for our business to employ an overused, but in our case, true descriptor of our progress, our accomplishments have come from years of intentional efforts to eliminate our high-yield debt, improve our capital structure and invest in the next stage and phases of our strategic business plan. I can't fully express to you in the script how great it feels to be high-yield debt free and better yet, how it feels to see the onset of countercyclical conditions, knowing we can continue investing in our business through the cycle while confidently returning capital to shareholders. Ryerson has come a long way over the past decade, but the opportunities within our sight to innovate and bring forward an industry-leading operating model for all stakeholders is now front and center, free of legacy burdens. On September 9, we shipped our first customer order from our new state-of-the-art service center in Centralia, Washington and expect our new CS&W University Park Service Center to be operational in the third quarter of 2023. On November 8, we celebrated 180 years operating under the Ryerson brand at our Investor Day in the New York Stock Exchange, where we showcased our operational, financial and digital initiatives and unveiled our next phase financial targets. In December, we were proud to publish our inaugural ESG report, which showcases the integrity with which Ryerson operates and outlined important sustainability initiatives we have underway for a cooler and cooler future, including our target of reducing Scope 1 and 2 emissions by 80% by 2040 as well as the release of our proprietary Emissions Illuminator application. Our team efforts over the past few years and especially in 2022 have culminated in modernizing our service center network, transforming our balance sheet and making material down payments toward Ryerson's next stage of growth. Emerging trends in onshoring, shifting trade paradigm and fiscal investments in infrastructure, climate transitioning and semiconductor manufacturing will likely mean the beginning of an imperative metals-intensive overhaul of our society and economy. In this new paradigm, Ryerson's investments in value-added manufacturing, customer-centric connected distribution networks and modernized operations position us for a bright future for all of our stakeholders. With that, I'll now turn the call over to Mike to further discuss the pricing and demand environment.

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 to address their needs throughout the business cycle as well as anticipate where our services, equipment and capabilities can add value. In the fourth quarter, we saw shifting trends in pricing for the metals commodity prices underlying our product mix. While decreasing through October, stainless and aluminum pricing increased in November amidst firming international demand, increased energy and input costs as well as tighter supply at LME warehouse inventory levels. Closer to home, domestic hot-rolled coil or HRC continued its decline for most of the quarter, finding support in December. Since that time, HRC prices have steadily risen, headlined by 6 price hikes from mills and longer lead times, also helped along by falling import levels and increases in iron ore and scrap pricing. Despite the late quarter price increases, due to fourth quarter, U.S. Midwest HRC declined 4%. On the other hand, due to the sharp price increases starting in November, LME Aluminum increased by 8% and LME Nickel prices rose by 36%. These price changes translated to our metals mix, meeting our guidance expectations with an 8% sequential decrease in average sell price to $2,770 per ton. Looking to the future, we see supportive demand factors influencing pricing, including the resurgence of demand for industrial metals internationally, particularly from China's economy reopening and the end to their zero-COVID policy. However, domestically, the fourth quarter saw a holiday seasonal slowdown in manufacturing, combined with the effects of higher interest rates and high inflation continued to impact the demand for industrial goods. The slowdown in demand in the U.S. was reflected in key macroeconomic indicators. United States industrial production continued to decelerate through the fourth quarter. Additionally, the U.S. Purchasing Managers' Index or PMI, after continuing to indicate slowing growth since the second quarter, declined below the growth threshold of 50 in November. In the fourth quarter, North American industry shipments as measured by the Metals Service Center Institute or MSCI, contracted 8.3% quarter-over-quarter compared to Ryerson North American volume declines of 9%. However, on an annual basis, North American MSCI shipments contracted by 2.3% compared to Ryerson's shipments contracting by 1.9%, implying a slight market share gain. Early first quarter indicators point to improve demand trends from the fourth quarter of '22. In addition to typical sequential seasonal trends, factors influencing our sales volume and pricing include incrementally normalizing supply chains, interest rate policy and inventory restocking as metal pricing appears to have inflected from a mid-quarter reference file. Similarly, our industrial customers, while still evaluating lag effects from current and future Federal Reserve interest rate increases are still working through durable order backlogs. Turning to our end markets. End market performance saw normal seasonal softness. As such, Ryerson noted sequential shipment decreases across all of our end markets in the fourth quarter of 2022. On a full year basis, commercial ground transportation, oil and gas, HVAC and construction equipment increased sales volumes, while consumer durables and food processing and agricultural equipment saw slight volume declines. Finally, I would like to echo Eddie's earlier statement. The investments we have made in our technological capabilities and distribution network, including the new Emissions Illuminator app and service center in Centralia are geared for the current and future needs of our customers. As our customers have experienced over the past few years, changes in supply chains can have large impact on our business. While upcoming changes in decarbonization are fluid and the evolution of product needs present the changing landscape, Ryerson can serve as an important one-stop shop business partner that can help navigate change through solutions based on our interconnected network and advanced service capabilities. As we look forward to 2023 and beyond, we are excited about the work we can do with our customers and the future that we can build together. With that, I'll turn the call over to Jim for our fourth quarter results and first quarter outlook.

Thanks, Mike, and good morning, everyone. I'll start by addressing the LIFO charge we took in the fourth quarter. We had previously expected LIFO income in Q4 based upon trends in carbon steel, aluminum and stainless steel-related indexes from March through November in carbon and for aluminum and nickel from June through October. We note that carbon steel disinflationary trends and resulted LIFO credit impacts behaved as modeled and were consistent with broader manufacturing leading indicators. For aluminum, spot index and futures pricing stabilized in October and moved higher through year-end. For nickel, the inflection was more dramatic as the price of nickel increased by 50% from trough to peak during the September through December of 2022 interval. Although this caused an unexpected LIFO expense for stainless and higher stainless inventory levels, let us say we weren't disappointed at all in the positive shift in stainless price fundamentals but had to appropriately recognize the Q4 2022 GAAP estimation methodology impacts on this welcome change in the nickel and molybdenum markets relative to how it looked through Q2 through Q3 forecasting lens. These factors then led to average inventory costs, ending the year higher than we had projected, and our annual LIFO credit was lower than previously anticipated. This led to LIFO expense of $34.6 million being recognized in the fourth quarter. Inventory days of supply in the fourth quarter ended at 90 days. This, coupled with commodity cost inflections upward in the back half of the quarter led to the average cost in inventory remaining elevated. Although this had a onetime negative impact to margins in the quarter for the annual true-up, increased commodities future prices into the first quarter for our products provide a more promising outlook for the start of 2023 than previously expected. Looking to the first quarter of 2023, we expect volumes to sequentially increase slightly more than typical seasonality. As such, we expect first quarter revenues to be in the range of $1.37 billion to $1.43 billion, with sales volumes expected to be up 10% to 12% sequentially and average selling price to be down 1% to 3%. Based on these expectations, we forecast adjusted EBITDA for the first quarter of 2023, excluding LIFO, in the range of $78 million to $82 million and earnings in the range of $0.98 to $1.06 per diluted share. In the first quarter, we expect the LIFO expense of approximately $5 million. In the fourth quarter, we generated $182 million of operating cash and ended the period with $367 million of total debt and $328 million of net debt, a decrease in net debt of $98 million compared to the third quarter. Ryerson's leverage ratio increased slightly quarter-over-quarter to 0.6x, but remains low historically and at the low end of our leverage target range, while the company's available global liquidity is at historic highs and increased slightly quarter-over-quarter to $909 million. For the full year, we generated $501 million of operating cash and decreased net debt by $260 million. In the past year, we transformed the capital structure of our business by redeeming $300 million of our 8.5% senior secured notes, which retired all our existing high-yield debt and is expected to save Ryerson over $25 million in annualized pretax interest. Going forward, as we continue our focus on operational and financial efficiency, we will use our $1.3 billion revolving credit facility strategically to fit the nature and needs of our business. In terms of shareholder returns, Ryerson returned approximately $7 million in the form of share repurchases and dividends in the fourth quarter. Specifically, we repurchased close to 33,000 shares of our common stock, returning approximately $1 million to shareholders and paid a quarterly dividend of $0.16 per share, amounting to a cash return of approximately $6 million. On a full year basis, Ryerson returned approximately $70 million to shareholders, which represents 1.7 million of shares repurchased and $0.54 of dividends declared per share. Finally, we announced a first quarter of 2023 cash dividend of $0.17 per share, which is the sixth consecutive increase in our quarterly dividend. With this, I'll turn the call over to Molly to provide further detail on our fourth quarter financial results and our CapEx plans for 2023.

Thank you, Jim, and good morning, everyone. In the fourth quarter of 2022, Ryerson reported net sales of $1.3 billion, which was at the high end of our guidance range. In the same period, gross margin of 12.7% was impacted by a LIFO expense of $35 million as average inventory costs came in higher than forecasted on better-than-expected commodity price inflection later in Q4. Excluding LIFO expense, gross margin was 15.3% as cost of goods sold reflected consumption of higher cost of materials through our metals mix, while our average selling price declined in line with guidance. On the expense side, warehousing, delivery, selling, general and administrative expenses increased 2.1% to a $190 million, primarily driven by operating costs related to newly acquired companies. For the fourth quarter, net loss attributable to Ryerson was $24.1 million or $0.65 per diluted share. This includes reorganization expenses of $5.3 million, primarily related to ERP system conversion costs as well as relocation expenses for our new state-of-the-art facility in Centralia, Washington. For the full year, net income attributable to Ryerson was a record $391 million or $10.21 per diluted share. This includes a loss on the retirement of debt of $21.3 million, gain on sale of assets of $3.8 million and a bargain purchase gain of $0.6 million. Excluding these onetime items and the associated income taxes, adjusted net income attributable to Ryerson was $403.6 million or $10.54 per diluted share. In the fourth quarter, Ryerson achieved adjusted EBITDA, excluding LIFO, of $28.7 million and generated $148 million in free cash flow. For the full year 2022, Ryerson achieved adjusted EBITDA, excluding LIFO, of $582 million and generated $404 million in free cash flow. Capital expenditures were $34 million in the fourth quarter. And for the full year, we invested, excluding acquisitions, approximately $105 million in our business, in line with our budget. This amount comprises both maintenance and growth projects, including service center modernizations in Centralia, Washington and University Park, Illinois. As we look forward to 2023, we anticipate full year capital expenditures to be around $95 million. This is comprised primarily of our base maintenance and growth CapEx spend as well as spending on the completion of our state-of-the-art facility and University Park, which replaces the previously sold CS&W facility in Chicago. We look forward to the opening of this facility in the second half of 2023. And with this, I'll turn the call back to Eddie.

Thank you, Molly. As we look forward to 2023 and the next stage of Ryerson's advancement, we would like to emphasize that our efforts are underpinned by our mission, which is to create great experiences for our customers, employees, shareholders, suppliers and communities. Our ongoing development of an investment in an intelligent network of value-added metals service centers, delivering industrial metal solutions with joy, speed, value-add, scale and consistency is the core of these efforts. Who doesn't want and need better experiences in every facet of life and work. The world of today and tomorrow that provides for a better quality of life and broader-based prosperity will be largely created and built with recyclable and sustainable industrial metals. That is why metal matters, as you'll experience when visiting us at Ryerson.com, and why the Build Now movement at MSCI.org are so vital and imperative. Let's all passionately advocate for manufacturing and all the good that it creates and let's keep progressing together. With that, we look forward to your questions. Operator?

[Operator Instructions]. And our first question is going to come from Phil Gibbs, KeyBanc Capital Markets.

Fourth quarter operating expenses, I think, a $190 million plus from what I remember. I think Molly called out $5 million of ERP but still probably would have been a little bit higher than we thought relative to where you were in the third quarter with the lower volume. So what's the level of operating expense that we should expect for the first quarter relative to the fourth, because I know that there can be some volatility in that based on true-ups?

Yes, of course. I mean, we have to account for the businesses that we acquired and sort of some of the lagging effects of those expenses post acquisition, even though we're really happy with the synergy cases that we're seeing early in the post-acquisition period. And I would also say that we lost a little bit of expense leverage in the fourth quarter just given a dip in revenue, but we still feel that we're operating within our best operating traditions of being able to realize expense leverage, particularly with some rebound in price. And then some of the initiatives that we have underway to take cost out, especially non-value-added costs and variabilization of our cost structure. So we expect expense leverage certainly in Q1.

What about just the absolute level of operating expense versus that fourth quarter baseline?

Yes. I mean we're seeing some OpEx costs come down, a little bit in transportation, a little bit in energy. There are some, what I'll call, remaining inflationary cost impacts that are coming through the OpEx P&L. But I really think our management of those expenses is going to be strong as it's been historically. I can ask John Orth to provide a little bit more color on that.

Thanks, Eddie. Phil, from an expense perspective, when we look back at 2022, first off, our teams did an outstanding job of managing through the supply chain challenges and making sure that we had all manufacturing supplies, operating supplies to provide service to our customers. With that said, the area where we saw the greatest inflation was around fuel with diesel being up substantially in 2022. That is forecast to come down from a high of over $5 a gallon to about $4.50 a gallon this year. So that's an area that we do expect to see benefit. And additionally, our team in Central Dispatch continues to use our digital tools, looking across the network to combine loads and to maximize utilization of our fleet.

And just a couple of other data points. Certainly, we certainly look to capture the or the restructuring impacts of ERP conversions and also facility conversions as we moved from Renton to Centralia and even some, what I'll call, very early pre-operating and start-up costs in University Park. And as those things transition through our steady-state operating cost environment for those modern and new facilities should help bring our overall cost curve down as well.

Perfect. And then looking into the first quarter from the fourth, what type of margin improvement are you expecting on a LIFO or FIFO basis or however you're looking at or you're thinking about it. And I also know that typically, when hot rolled prices rise, particularly as much as they have, that can be a good thing for you all, but it does take a little bit of time to filter through, given the quarterly lag. So I would have thought you would have actually seen some margin pressure given you're probably still selling at some old prices in the sheet side. So just maybe kind of dissect all that.

Sure. I'll take a first cut at it. So you're right, Phil. I mean we've -- certainly, you and I have known each other for a long time, have talked about sort of the phases, the oscillations in the industry, especially when you have a program book of business and you've got a spot transactional book of business. Spot transactional business is usually more responsive as replacement cost changes relative to the average cost of inventory that you have. So you see more positive effects at that inflection in turn in that spot book. And then, of course, your program book takes longer to adjust. So for us, it's probably -- it looks like a tailwind really from mid-Q2 right now if you project through, you would see contract price improve on that lag while transactional margins continue to improve. So based on our 50-50 split book of business, it's a good tailwind for us, assuming that this mini cycle extends and prices continue to move higher or at least maintain their present levels.

[Operator Instructions]. And our next question comes from Katja Jancic from BMO Capital Markets.

Can you talk a little bit about the stainless side, specifically, I know the prices are increasing, but how are the inventories and what are you seeing right now?

Yes, I'm going to have Mike Burbach give me a healthy assist here in just a moment. What I would tell you about stainless and it was really -- it was puzzling in this way. And stainless market was so tight for really, I'd say, 12 to 15 months was extraordinarily tight. It was very much an availability market if you really track through the first quarter of 2021 probably through April and May of 2022. And then you started to see inventories accumulate and imports were very, very high, particularly from Taiwan, for example. And the channel got glutted. The channel really got glutted. I mean, we haven't seen stainless industry inventories above 5 months. As a matter of fact, in all my time in the industry, I haven't seen industry stainless inventories above 5 months. And so there was certainly a glut and you had import prices that were firmly in the market. So even as stainless inflected, even as nickel inflected and molybdenum is tight, even though the underlying cost drivers of the product were improving, you still had to clear this major inventory overhang against demand that was falling, particularly on the consumer side, where now we've started to see some rebounds and some positive inflections in the market, both on the price side and on the demand side. Q4 certainly saw all those things come home to roost at one time until you could kind of clear that and rebalance the market for stainless, which is still in progress, but showing signs for turning to some reasonable help. Mike?

Thanks, Eddie. Yes, I think you hit it pretty good. Although the biggest issue that hit us really, really in Q3, Q4, second half of the year was that import piece. There was a pretty decent bubble that came in after months and months of a very tight supply. So we went from the situation of very little channel inventory to far too much. And so fast forward to today, the import piece seems to have normalized considerably and the amount of imports coming in are back to historical levels, if not lower than normal as things have been correcting themselves. So we're seeing overall inventories in the industry start to tick back down. Activity so far in Q1 in the stainless side is ticking back up. And so that normalization is starting, but it still has a few months to go.

Okay. And maybe just on your cash conversion cycle, it has been ticking up. Can you talk a little bit about that? And how should we look at it going forward?

Yes, I'm going to have Jim Claussen chime in here in just a moment. Let me just say this. I mean, we could have done a better job when it came to our cash conversion cycle, and we have higher expectations for ourselves when it comes to managing that component of our business. However, I would say this, given the pandemic hangovers and the extreme oscillations and gyrations in that working capital environment in terms of past due deliveries of metal and then certainly trying to manage on the customer side, what I would call a difficult flow through the value chain really for the entire industry. And I think you're even seeing it now in some of the dynamics that exist relative to price and demand. Just there's a lack of flow. I heard a humorous metaphor that if everybody had to report out, like the NFL reports out their injury reports, you have all these different companies that would be telling you what their injuries are. And so I just think there's a lack of flow throughout the supply chain, and that certainly showed up in working capital management in the second half of the year. But we expect to get back to our historical and really our own performance expectations when it comes to net working capital management and where that cash conversion cycle should be. Jim?

Yes. Thanks, Eddie. Katja, I think really, Eddie said it really well there. I think on the cash conversion cycle uptick, we really saw it on the days of supply on the inventory front. As noted, as we moved up a little bit outside of our target range of 70 to 75 days and would expect that to moderate. On the AR side, we expect that to perform seasonally. That's been very consistent across the board. So it was really an inventory-driven event.

Yes. The AR performance has been outstanding and continues to be outstanding. On the inventory side, we can -- we believe we can do a better job just in terms of managing through some of these distortions that have turned out to be pretty protracted.

I have no further questions in the queue. I'll turn it back over to you.

Thank you for your continued support of and interest in Ryerson and please stay safe and be well, and we look forward to being with you all in May for our first quarter 2023 earnings release and conference call. Take care.

And this concludes today's call. Thank you for your participation. You may now disconnect.