Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to Ryerson's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jeff Horwitz, with Ryerson Investor Relations, you may begin your conference..

Good morning. Thank you for joining Ryerson Holding Corporation's Second 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, Mike Burbach and Jim Claussen, our 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, 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. 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 second 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..

Thank you, Jeff, and thank you all for joining us this morning. I want to first thank our customers, whose business we never take for granted. I also want to thank my Ryerson and Central Steel & Wire, or CS&W, colleagues for executing well during a challenging second quarter.

Ryerson exceeded our top line guidance and effectively managed our expenses and working capital, generating significant free cash flow, which we used to reduce our long-term debt.

CS&W completed its first full year since Ryerson acquired the company on July 2, 2018, and exceeded our first year benchmarks with stronger revenue retention, exceptional working capital management and greater expense synergies than we anticipated in our acquisition model.

Despite these successes, Ryerson saw sharp downward moves in key price drivers, along with recessed industry shipping conditions during the second quarter.

The industry climate, which around late April and early May, looked like it might inflect favorably, turned harshly negative following an unexpected bout of phase in trade discussions between the U.S. and China and slowing business investment.

The impact for Ryerson was a significant decline in carbon sheet prices that resulted in prepaid margin compression. Our decline in margins was most notable on our hedge book and, at CS&W, where we incurred significant physical inventory holding losses on overbought carbon sheet related to annual customer programs.

While we view the aforementioned events as transient, they highlighted ways in which we can improve the business as only suddenly difficult conditions can.

The second quarter laid bare a prolonged industry destocking cycle amidst a slowing of domestic steel output at a time of slackening demand and inventory deflation, which gets us back to a countercyclical playbook, where we expect to accelerate free cash flow generation, deleverage the balance sheet, remove cost and enhance asset efficiency over the balance of the year, while continuing to advance our strategic priorities.

Although we surely would have appreciated a second consecutive year of industry growth in shipments and pricing, we will put this countercyclical period to good use as we move beyond the severe margin compression experienced during the second quarter.

Turning to the current economic environment, commodity price declines accelerated in the second quarter of 2019 after a brief inflection upward in March due to weakening demand conditions, ample domestic supply and uncertainty around trade policy, which led to cautious buying patterns by steel consumers who destock inventories to a greater extent, and over a longer duration than anticipated.

As of the end of July, CRU hot-rolled coil and LME Nickel prices have started to inflect higher, while Midwest aluminum prices have been relatively stable, albeit with a deflationary bias and CRU carbon plate prices continued to decline through the quarter.

North American service center tons shipped continue to contract in the second quarter of 2019 compared to the prior year, evidenced by a 7.7% decline in shipments, as measured by the Metals Service Center Institute or MSCI.

At the same time, Ryerson's North American same-store tons shipped, excluding the impact of our third quarter 2018 acquisition of Central Steel & Wire, were down only 1.7%. The industrial demand outlook appears to be softening as we move through the second half of 2019 as U.S.

industrial demand and PMI indicators continue to show slower manufacturing expansion. Turning more specifically to end markets in the first half of 2019 compared to the first half of 2018, Ryerson experienced lower shipment on a same-store basis in several end markets, most notably oil and gas and food and agricultural equipment sectors.

HVAC, metal fabrication and machine shop and commercial ground transportation sectors were the strongest performing end markets, with volume growth in the first half of 2019 on a same-store year-over-year basis.

Turning to the Central Steel & Wire acquisition, in its first year as a part of the Ryerson network, it exceeded expectations, albeit with stronger returns in the second half of 2018 compared to the first half of 2019.

CS&W was acquired with significant working capital, which management continues to reduce to operate in line with Ryerson's same-store service center metrics.

During the deflationary cycle, which began in August of 2018 and continued through June 2019, CS&W experienced outsized inventory holding losses compared to Ryerson's base business with losses accelerating in the second quarter of 2019, given the significant decline in CRU hot-rolled coil prices during the period.

It is important to note that CS&W's commodity mix by tons in inventory is approximately 90% carbon as compared to Ryerson's 75% physical inventory carbon exposure.

Although this level of carbon exposure worked against us in the second quarter of 2019, it helped us accelerate structural improvements and inventory management moving forward as the CS&W team continues to apply well-honed Ryerson inventory management practices to the business.

Additionally, when viewed through a longer term lens of the average CRU hot-rolled coil price over the past 12 years of $630 per short ton and the benefits of CS&W's carbon long products, carbon tube products and carbon strip-mill plate products mix, we'll deal with the short-term margin compression issues in exchange for excellent product mix attributes with an expected return to normative pricing levels over the medium to long term.

CS&W incurred negative adjusted EBITDA, excluding LIFO, of $2 million in the second quarter of 2019 compared to our expectation of positive adjusted EBITDA, excluding LIFO, of $6 million for the period and compared to $3.4 million in the first quarter of 2019.

We expect inventory holding losses to dissipate in the third quarter of 2019 as hot-rolled coil prices appear to have stabilized and CS&W's inventory position has been reduced from almost 140 days at the time of acquisition to 91 days as of June 30, 2019.

Over the past year, CS&W surpassed its post-close performance benchmarks by exceeding revenue retention targets, achieving approximately $30 million of expense savings on an annualized basis from supply chain synergies and operational expense takeouts, over $60 million in working capital reductions and $12 million of cumulative proceeds from real estate sales for operations that were consolidated into existing facilities.

As we move into year two of the CS&W post-close synergy plan, we continue to believe in our long-term mid-cycle target for Central Steel & Wire of $600 million in revenue and $50 million in adjusted EBITDA, excluding LIFO, on an annual basis.

For the third quarter of 2019, Ryerson anticipates revenues of $1.075 billion to $1.125 billion with tons shipped down 3% to 5% compared to the second quarter of 2019 due to normal seasonality patterns and decelerating end market demand.

Ryerson anticipates more significant volume declines in the oil and gas sector to be offset by relative strength in commercial ground transportation and construction sectors.

Commodity prices are expected to stabilize and move modestly higher for carbon and stainless products, while aluminum prices are expected to be modestly lower for the remainder of the year.

However, due to recessed commodity prices experienced in the second quarter of 2019, we expect average selling prices in the third quarter to be down 3% to 5% as margins begin to recover.

LIFO income in the third quarter is expected to be in the range of $26 million to $30 million, with accelerating movement of average inventory cost to replacement costs.

Given the aforementioned expectations for pricing and demand in the third quarter of 2019, the company, therefore, expects earnings per diluted share in the range of $0.66 to $0.77 and adjusted EBITDA, excluding LIFO, in the range of $46 million to $50 million.

Ryerson expects to continue to deleverage, given the continuation of countercyclical cash flow generation meaningfully reducing long-term debt for the balance of the year. With that, I'll turn the call over to Erich, who will discuss the highlights of our second quarter 2019 performance..

Thanks, Eddie, and good morning. In the second quarter of 2019, Ryerson achieved revenues of $1.2 billion, an increase of 14% compared to $1.06 billion in the second quarter of 2018, with tons shipped 14.7% higher, partially offset by a decrease in average selling prices of 0.7%.

On a same-store basis, revenues for the quarter were $1.05 billion, a decrease of 0.6% year-over-year, with tons shipped down 2.2% and average selling prices 1.6% higher. Gross margin was 17.6% for the second quarter of 2019 compared to 18.8% in the first quarter of 2019 and 17.5% for the same quarter last year.

Included in cost of materials sold during the second quarter of 2019 was LIFO income of $12.9 million compared to LIFO income of $20.1 million in the first quarter of 2019 and LIFO expense of $43.9 million in the second quarter of 2018.

Gross margin, excluding LIFO, was 16.5% in the second quarter of 2019 compared to 17.2% in the first quarter of 2019 and 21.7% in the second quarter of 2018.

Margin compression during the second quarter was impacted by mark-to-market hedging losses and inventory costs falling at a slower rate than average selling prices, most notably at Central Steel & Wire, which continues to work down its large inventory positions in carbon sheet products.

Warehousing, delivery, selling, general and administrative expense increased by $25.7 million or 18.5% in the second quarter of 2019 compared to the year ago period, primarily driven by the acquisition of Central Steel & Wire. On a same-store basis, expenses decreased by $5.2 million or 3.7% compared to the second quarter of 2018.

Warehousing, delivery, selling, general and administrative expenses as a percentage of sales increased to 13.7% in the second quarter of 2019 compared to 13.1% in the second quarter of 2018.

However, on a same-store basis, warehousing, delivery, selling, general and administrative expenses as a percentage of sales declined by 40 basis points year-over-year to 12.7%, demonstrating Ryerson's ability to effectively manage costs in any environment.

Net income attributable to Ryerson Holding Corporation was $16.4 million or $0.43 per diluted share in the second quarter of 2019 compared to $17.5 million or $0.46 per diluted share in the prior year period.

Ryerson achieved adjusted EBITDA, excluding LIFO, of $50.7 million in the second quarter of 2019, a decrease of $12.3 million compared to the first quarter of 2019 and $55.9 million less than the second quarter of 2018.

Turning to first half results, Ryerson generated revenues of $2.44 billion, an increase of 21.9% compared to $2 billion for the same period last year, with tons shipped 16.2% higher and average selling prices 4.9% higher.

On a same-store basis, revenues for the first half of the year were $2.11 billion, an increase of 5.5% compared to the first half of 2018, with average selling prices 7.1% higher and tons shipped down 1.4%.

Net income attributable to Ryerson Holding Corporation was $45.9 million or $1.21 per diluted share in the first 6 months of 2019 compared to $27.9 million or $0.74 per diluted share for the same period of 2018.

Adjusted net income attributable to Ryerson Holding Corporation, excluding restructuring and other charges and loss on retirement of debt, was $47.1 million for the year-to-date period for 2019 or $1.24 per diluted share.

Adjusted EBITDA, excluding LIFO, was $113.7 million in the first 6 months of 2019 compared to $168.8 million in the first 6 months of 2018. In the second quarter of 2019, Ryerson's inventory balance stood at 75.3 days of supply or 73 days on a same-store basis, up from 70.5 days in the second quarter of 2018.

Our same-store inventory levels were within our target range of 70 to 75 days, while Central Steel & Wire continued its commendable progress in moving inventory levels meaningfully closer to acquisition post-closing targets. We maintained ample liquidity throughout the quarter.

As of June 30, 2019, borrowings were $512 million on our primary revolving credit facility, with additional availability of $395 million. Including cash, marketable securities and availability from foreign sources, Ryerson's total liquidity increased to $450 million as of June 30, 2019, compared to $414 million as of June 30, 2018.

Cash generated by operating activities was $66.5 million for the second quarter of 2019 compared to cash used in operating activities of $49.6 million in the year ago period, primarily driven by lower working capital requirements.

We utilized our free cash flow to reduce our debt outstanding by $40.8 million and to invest in capital expenditures of $12.1 million during the period.

Ryerson expects to generate significant cash from operating activities in the second half of 2019, given lower replacement inventory costs in the third quarter of 2019 and seasonal inventory destocking expected in the fourth quarter of 2019. Now, I'll turn the call back over to Eddie to conclude..

Thanks, Erich. Ryerson performed admirably in a challenging quarter, showcasing our ability to go countercyclical to generate free cash flow in a declining price environment, but not without opportunities to make further improvements in the business and applying learnings from the second quarter.

As commodity prices appear to have stabilized and moved higher across more than 70% of our commodity mix, despite persisting weakness in aluminum sheet and SBQ bar, we anticipate a runway to substantial deleveraging over the second half of 2019 as countercyclical cash flows increase and margins expand.

When we further do all the variables affecting our business, our value-add and intelligent service center network business model continues to take shape for long-term industry competitive advantage.

Our net book value of equity continue to grow as we continue improving our balance sheet and operating model, moving from the current countercyclical interval to the next cyclical industry interval. With that, let's open the call to your questions.

Operator?.

Thank you. [Operator Instructions] Your first question comes from the line of Chris Terry from Deutsche Bank. Please go ahead..

Hi, Eddie and team, just a few questions from my side; just in terms of the volume guidance, down 3% to 5%, we've had, I guess, mixed feedback from a number of the steel companies versus service centers in how they see that outlook.

Just wondering if you can comment on the impact of weather and some of the inventory destock in the first half? And whether that might mean that, that 3% to 5% that typically plays out, might be conservative in this case for 2019?.

Chris, this is Eddie. There's a tailing-out effect. And when you look at the durations of these cycles, it's -- when we go countercyclical and, I think, when we look back where we were sitting on May 3 during our last earnings call, our base case was still HRC of 650 to 750. The CRU was still hanging in there around, I think, it was $702 a ton.

And a lot of the variables were pointing at least to a reasonable probability that margins could expand and demand would go higher. Just the opposite happened 36 hours later, the U.S. and China disengaged from trade talks, and I think folks got a lot more conservative and the destocking cycle persisted.

So these things tend to have a long tail, call it, 9 months. And it looks like we're going into the fifth quarter of a countercyclical period, but that's also good in this sense.

And that is, when we go back and study the durations of these cyclical and countercyclical periods, we find that they last anywhere between 4 and 10 quarters, and we're already in the fifth quarter of this one. So we see inventory to stocking is tailing out, but it's going to end.

And I think it's ending now and stabilizing with just the typical seasonal weakness that we see from Q2 to Q3. When we look at our transactional quoting levels, which we think is a leading indicator, we see that from Q2 to Q3, our transactional quoting levels are down about 5%.

And so we use that as a good bit of intelligence to help guide our expectations for the third quarter. And the program business is hanging in there with more or less typical seasonality, and that's how we get to the 3% to 5%..

Eddie, and then -- but on volume as well, I think a lot of your comments, they were on maybe on the pricing side, I guess, the guidance is 3% to 5% down for both price and volume, any comments on the volume side?.

Yes, I think pricing and volume are tracking one another going from Q2 to Q3, again, with seasonality, plus maybe a thumb on the scale, if you will, as we just tail out of this, I'd say, the highest impact of this countercyclical period, as that tails out and starts to reverse.

You look at that V shape in a CRU, June is sitting at 580, went all the way down to 505, then reset at 523. So we didn't really get a U, we got more of a V. Coming back up to say 600 -- 580 to 600 spot, and the futures are showing 640 for the first quarter of 2020. So we're seeing some recovery in hop-in price. But again, there's a lagging effect.

Once you get to that bottom, it does pull down prices before prices turn up again, and you start to get margin expansion before prices turn up again, as your cost of goods sold finally catches up to replacement cost and then prices turn higher. So that's the basis and foundation for that Q3, down 3% to 5%.

Now we're getting a nice tailwind in nickel, and we'll see how that plays out over the balance of the year. But right now, we're at a 12-month high for nickel. And so that's going to play into our financials as we move forward over the next 4 to 5 months. Aluminum is still muted to slightly down. SBQ is somewhat pressured. HRC is turning around.

Plates seem to be stabilized. And so when we look at our overall commodity mix, it's turning favorable. But there's still a lagging tailing out effect that's going to pull prices down by about 3% to 5% as we see it..

Chris, this is Kevin Richardson. One thing that I would add, in an environment with persistent declining prices, what we do know is that there are some customers that destock and take their inventories down really low until they see an inflection point, but it's really hard to quantify how much destocking is going on out there.

But the reverse, we would expect would start to happen that some people will build back some inventory. So trying to net those two things out is difficult, but we're definitely have been in a destocking environment..

Okay. Just a couple of others for me, on the hedging losses that you talked about, I think you said that's not related to CS&W.

Just wondering if you can comment on what the hedging losses were? And then working capital that are released during that quarter, what can we expect for the second half?.

Yes, sure. With respect to the hedge book, when you look over the year, when you look at all of our tons, we've got a strategic hedge book that was positioned short against a long position physically going into quarters 1 and 2. Our customer hedge book is positioned more long.

And so when you net those together, it looks like for the year, the impact is going to be about to $2 to $2.25 a ton. So that peaked in Q2. We were well positioned, but we had one position that was idiosyncratic, and that was iron ore. And so we're past that, that's transient, and so we move on as we go into Q3.

And then we'll get back about $4 million to $6 million as customer hedges unwind and we get those counterparty payments through the balance of the year..

Okay, thanks. And then just on working capital for the rest of the year. Thanks..

Yes, I mean, for working capital for the rest of the year, if you take the guidance that we gave you, I think you can go ahead and model and compute into where we're going to come out cash flow wise. I think if you look at this period that we're in right now, it feels like a mini 2015.

So if you look at the ratio of the cash that we generated through 2015 as we are moving from, say, $3.6 billion in revenue down to about $3.2 billion in revenue, I think you can model the type of cash flow we're going to generate and the type of working capital release that you're going to see in quarters 3 and 4 as we move through 2019..

Okay. Thanks, guys. That's it from me..

Thanks, Chris..

[Operator Instructions] Your next question comes from the line of Matthew Fields from Bank of America Merrill Lynch. Please go ahead..

Hi, everyone. This is Matt Castellini here on for Matt Fields..

Hi..

So we've seen some domestic mills and something to raise plate prices by $40 a ton recently last week.

Would you say customers are -- been accepting these recent price hikes on plate and sheet? Where do you see sort of sheet price selling?.

I think it's still to be determined. I think some of the price increases have taken hold. There's usually a phasing-in effect.

And I think we're going to have -- we're going to look at where scrap settles out over the next couple of months to see how much of this is really structural and how much of it is a cost push versus how much of it is really more of a stabilization effort by the mills.

Right now, it looks like about, call it, half of that price increase is taking hold. I think plate still to be determined, and it feels more like a stabilization effort at this point..

Got it. Got it. Okay.

I guess, secondly, how would you guys categorize the sheet market right now? Oversupplied? Undersupplied? Or just okay in your opinion?.

Sheet market is well supplied. No problem getting sheet anywhere..

Okay. Great. And then I guess, lastly, I know you mentioned meaningfully reducing debt in 2H '19.

So I was just wondering, any updated expectations about refinancing your balance?.

Yes. I mean, we still view refi as opportunistic and we're 33 months out of our maturity date or out from our maturity date. So, plenty of time to work that equation more in our favor. So we'll just keep monitoring. We'll keep monitoring market conditions, and we'll see where we might find an attractive window to refinance..

Thank you very much..

Thank you..

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

Thanks for joining us on the call this morning, and we look forward to being with you again during our Q3 call..

Thank you. This concludes today's conference call. You may now disconnect..