Ryerson Holding Corp (RYI) 2014 Q4 法說會逐字稿

Good day and welcome to Ryerson's fourth-quarter 2014 earnings conference call. Today's conference is being recorded.

For opening remarks and introductions I would like to turn the call over to Ryerson's Head of Communications, Christopher Bona. Sir, you may begin.

Good morning. Thank you for joining Ryerson Holding Corporations 2014 earnings call. I'm here this morning with Eddie Lehner, Ryerson's Executive Vice President and Chief Financial Officer.

Mike Arnold, Ryerson's President and Chief Executive Officer, sends his regrets for not being able to participate in today's call. Mike's mother passed away over the weekend and funeral services are being held today in Northeastern Ohio in her memory.

We send our deepest condolences to Mike and his family during this difficult time. Mike expressed his welcoming any and all follow-up calls from participants when he returns to the office following this period of bereavement.

Before we get started let me remind you that certain comments we make on the 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 suggested by the forward-looking statements.

Such risks and uncertainties include but are not limited to the volatility in metals demand and prices and the cyclicality of the various industries that we serve. Forward-looking statements provide our current expectations or forecasts to future events.

You are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date that they are made and are not guarantees of future performance. Important factors which may cause results to differ from expectations are included under risk factors in our annual report on Form 10-K for the year ended December 31, 2014.

In addition, our remarks today refer to several non-GAAP financial measures which exclude LIFO, IPO-related costs and other certain expenses. These non-GAAP measures are intended to supplement but not substitute for the most directly comparable GAAP measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release filed on Form 8-K yesterday which is available on the investor relations section of our website.

With that in mind I will turn the call over to our Executive Vice President and Chief Financial Officer, Eddie Lehner.

Thanks, Chris, and good morning, all. Also on the call today are Ryerson region presidents Mike Burbach and Kevin Richardson and Ryerson's Chief Accounting Officer and Corporate Controller Erich Schnaufer.

I'm happy to be here this morning to talk about our performance for the year which reflected the benefits of our ongoing corporate transformation. We achieved improvement in our key metrics despite margin pressure driven by high import levels and commodity price deflation in the second half of 2014. As you saw in our earnings release, net loss attributable to Ryerson Holding Corporation was $26 million for 2014 compared with net income attributable to Ryerson Holding Corporation of $127 million in 2013.

There were several one-time factors in our numbers including a major tax benefit in the fourth quarter of 2013, IPO expenses in the third quarter of 2014 and a swing from LIFO income of $33 million in 2013 to LIFO expense of $42 million in 2014. Once you get through this noise you will see the improvement in our underlying results. The bottom-line measure we've consistently used to track performance, adjusted EBITDA excluding LIFO, which eliminates these non-operating factors was up 28% year-over-year.

That is the best performance we have generated in three years. And adjusted EBITDA excluding LIFO as a percent of sales was the best in the last six years. As part of our transformation we are shifting our product mix from lower margin standard products toward higher value added products and services and more profitable end markets and customers.

Ryerson now processes well over half of the materials it sells including standard cut-to-length services. More importantly, we have grown in targeted product categories and gained market share in processed plate and long products. We are also making changes that enhance our competitive position and differentiate Ryerson in the marketplace.

We are building a digitally connected enterprise that links our more than 100 locations and processing capabilities so we can leverage Ryerson's scale and bring our vast capabilities to each local market. We leverage this connected enterprise with new tools enabling customers to take advantage of our speed and service. For example, we launched Ryerson Direct, which enables US customers to place orders and check status quickly and efficiently at any time, make us easier to do business with and creates another means of competitive differentiation.

In 2014 we realized improvement in key metrics namely sales of $3.6 billion increased to 5% for the year on higher average selling prices. We continued to effectively manage expenses which were down 1% excluding the IPO-related expenses incurred in the third quarter. While gross profit declined when you exclude LIFO expense in 2014 gross profit and gross margin expanded for the year.

Gross profit was $594 million, or 16.4% of revenue in 2014 compared with gross profit of $617 million, or 17.8% of revenue in 2013. Gross profit excluding LIFO income and expense was $636 million in 2014 up from $584 million and ex-LIFO gross margins increased 70 basis points to 17.6% versus 16.9% in the year-ago period. We improved our working capital management year-over-year with nearly a two-day reduction in inventory days of supply and a slight improvement in receivable days outstanding.

And while we reported a loss for the year due largely to expenses associated with the IPO, adjusted EBITDA excluding LIFO expanded 28% to $218 million. For the year we posted a net loss attributable to Ryerson Holding Corporation of $25.7 million, or a loss of $1.01 per share. Excluding the one-time expenses associated with the IPO, that income attributable to Ryerson Holding Corporation was $11.6 million, or $0.46 per share for 2014.

In 2013 we reported net income attributable to Ryerson Holding Corporation of $127.3 million, which included a $124.2 million reversal in the valuation allowance on deferred tax assets. Adjusting for this item, which was recorded as an income tax benefit, net income attributable to Ryerson Holding Corporation was $3.1 million in 2013. As we have talked about each quarter, we track adjusted EBITDA excluding LIFO as one of our key metrics and provide it for comparability to our peers.

Adjusted EBITDA excluding LIFO for 2014 was $217.5 million compared with $169.6 million in 2013. In the fourth quarter of 2014 the downward pressure on pricing and margins intensified, raw material costs deflated, demand weakened and channel inventories at service centers rose notably amidst highly elevated import levels which were up 14% from the third quarter to the fourth and up 34% for the full year. Although average selling prices rose sequentially, average material costs in the inventory rose more as in-channel purchases and on-hand inventory costs were peeking while commodity price benchmarks began falling.

Consequently, fourth-quarter gross margins excluding LIFO were down 110 basis points from the year-ago period and down 140 basis points sequentially. As a result of operating and non-operating factors net income attributable to Ryerson Holding Corporation was $4.8 million, or $0.15 per share in the fourth quarter of 2014 compared to net income of $118.2 million in the fourth quarter of 2013. As previously addressed the fourth quarter of 2013 included a reduction in the valuation allowance.

Excluding that income tax benefit we would have had a net loss attributable to Ryerson Holding Corporation of $6 million in the fourth quarter of 2013. Adjusted EBITDA, excluding LIFO, was slightly lower year-over-year at $40.1 million in the fourth quarter of 2014 compared with $41.5 million in the fourth quarter of 2013. Inventory days of supply for the full year were 82.3 days in 2014 down from 84.2 days in 2013.

Given the deflationary pricing and lower demand dynamics in play during the fourth quarter we are aggressively managing inventories down to levels reflecting the current environment. The sharp fall in metals prices has created margin compression with average cost inventories higher than spot replacement costs. Consequently, we are working to accelerate the replacement cycle to align average inventory costs with current selling prices.

At that point we believe the benefits of our corporate transformation and value added emphasis will again be reflected in expanding gross margins. Cash used in operating activities was $73.3 million for 2014. That included $67.4 million of contributions to our deferred employee benefit plans.

On the balance sheet we continue the process of deleveraging our balance sheet. During 2014 we reduced total debt $36 million, or 3%. As of December 31, 2014, borrowings under our primary bank revolving credit facility stood at $435 million with additional availability of $245 million.

Including our cash and marketable security balances, total liquidity was $328 million. For 2014 we saw growth in the majority of our end markets led by transportation and oil and gas. End markets experiencing lagging growth or contraction were heavy equipment including agriculture and electrical machinery including appliances.

Looking ahead these trends are likely to continue with the notable exception of oil and gas, continued pressure on agricultural equipment and decelerating growth in Class 8 truck builds. Through the first couple of months of 2015 commodity prices are trending lower.

Looking beyond the severe commodity price downdraft in volatility our transformation continues to build a stronger Ryerson throughout the business cycle. We look forward to a better capital investment cycle that breaks with the slow and uneven rates experienced over the past five years.

Finally, I would like to mention our year-end acquisition of Fay Industries, our first acquisition since going public. Fay is a well-managed service center with annual revenues of approximately $30 million.

Fay brings a loyal customer base, dedicated workforce, extensive bar and tube product knowledge and processing capabilities, is transactional account-centric and is an excellent strategic fit with Ryerson. While our first priority for deploying free cash flow is to reduce debt and deleverage the balance sheet, acquisitions like Fay support Ryerson's long-term strategy as we strike the right balance between debt reduction and growth.

With that let's open the call to your questions.

(Operator Instructions) Brett Levy, Jefferies.

With respect to the price of the bonds and the thoughts on the capital structure, can you talk a little bit?

We are always looking to improve our capital structure and we want to maintain a high degree of preparedness to take advantage of opportunities as they present themselves.

Can you talk about the route and sheet prices and how that might impact -- it seems like it's only gotten worse. Do you see a trade case coming? Can you talk a little bit about industry conditions?

And then also a little bit about aluminum? It seems like the Midwest premium is coming down. Can you talk a little bit about what you're seeing in the aluminum market as well?

We're certainly not preparing any trade cases. But what I would say is there certainly a lot of talk in the industry about that and when it comes it will come. And I think you can project reasonably well what the impacts of that may be.

I think right now as we survey the landscape and we see operating rates below 70%, which we haven't seen for a long time, and a lot more outages whether planned or unplanned, so that's the current environment. When you look at pricing I do think it is somewhat significant when you look at just the changes within the last 12 months and you look at aluminum you can see we've gone from $1.19 per pound including the Midwest premium. So you take $0.95 plus $0.24, that's down to $1 at $0.80 and $0.20, so aluminum is down 20%.

I think everybody had high hopes for aluminum, which don't appear to be materializing. Stainless is down 40% to 50% from its peak. Today stainless is $6.20 -- I mean nickel is $6.20 a pound and we reached a high of maybe $9.20 in-year in 2014, so a big dandruff there.

And then carbon, of course, $6.70 to $4.90 over the last 12 months, that's a 25% to 30% decline. So certainly the issue of the day is margin compression, getting inventory short, moving our average cost close to replacement cost and looking to reset that margin profile and looking for demand to pick up seasonally and even structurally so that inventories correct and margin profiles start to expand.

That was my last question. Talk about the seasonality here.

Obviously we kind of had a rough last part of the winter. Do you see something picking up as we move towards spring?

We are hopeful. As we look at transportation, as we look at our end markets transportation remains good.

Oil and gas of course has reverse course. And really what we are looking for now are indicators that within really our bread-and-butter of industrial equipment and industrial fabrication we are certainly hopeful that demand will pick up within those end markets to help really improve conditions in 2015.

If there's one thing that I could add, one thing we definitely see in the decelerating price environment is we see customers sitting on their hands. So nobody's building inventory right now and I think as long as prices continue to fall that's also playing into it in terms of the current environment.

Any sign of a bottom?

The deceleration of prices has definitely started to abate somewhat. Directionally it is still going down but not to the extent that it has been so it is hard to see. I would say we think that is going to bottom out here in the second quarter but it's hard to project.

Good stuff. Thanks very much. I'll get back in queue.

Matt Duncan, Stephens Inc.

Good morning, guys. This is Will on the call for Matt. Eddie, let me start.

I'm sorry to hear of the passing of Mike's mother. I was wondering if you can give any update on the possible timing of that transition and how the search is going there?

Thanks Will. I think the search is well underway.

The Board is doing a thorough and complete job. I think we are still on track within the timeline that was communicated in the 8-K that we filed on December 20.

Okay, great. Thanks.

And then digging in a little bit more on gross margin, I appreciate the color. I was wondering if you can help us think, maybe dig a little more and help us think about how you expect that to go throughout 2015 and maybe exactly what was the cause of the decline in the fourth quarter?

I would tell you that we are very all practiced in the art of managing these cycles and certainly we would welcome robust and consistent growth over a longer period. If you get to go back to even 2010 what the market has given you it has certainly taken back and then some.

So where 2013 was largely a deflationary year, 2014 was I would say deflationary in the first couple of months or maybe a continuation of 2013, 2014. Then for about five months we saw improving pricing dynamics and then of course we know what happened in the last quarter of 2014. And that seems to be continuing into the first part of 2015.

So we know it is time for us to generate countercyclical cash flow. We know it's time to get our inventories down and get short, bring those inventories closer to replacement cost and really look at our data, be good analysts and pay attention to our markets and look for those inflection points or we can selectively take positions to improve service levels. But I think right now if you look at MSCI inventories where they ended of the year, certainly the focus is on getting those inventories in line and resetting that margin profile going forward.

Great. Thanks, guys. I'll hop back in queue.

Jorge Beristain, Deutsche Bank.

Just had some questions about if you could just give us an update as to what is happening in international. It looks like this is the second or third quarter in a row where we've had really strong decreases in your international sales volumes and when we had discussed the strategy with you guys about a year and half ago I thought that's where you saw some of the growth markets, so I was just wondering if you could talk about obviously we are seeing the rollover in the Chinese steel market, but just if part of perhaps the upcoming management or senior management change is also implying perhaps a change in strategy towards international, or if you could just talk to that?

I wouldn't speculate on our portfolio of international assets and time that to the succession, necessarily. What I would say is that from a macro perspective if you look at China and Brazil certainly since 2010 the macro picture there has changed. And I think we are affected by that as anybody would be who is operating in country.

I think we have a strong operating team in China certainly since Leong Fang came onboard in early 2013. And so I think we are managing that business well within the conditions that are persisting.

In Canada we exited a product line in 2013 and 2014 which was carbon plate. We think our business in Canada has stabilized. The markets there have improved but Canadian growth is weak relative to the US and we'll see how the exchange rate changes change that dynamic.

Great. And could you talk about what your CapEx target is for 2015?

So for 2015 if you look at 2013 and 2014 we are right at about $22 million to $21 million and net of assets sales that would've been between $13 million and $15 million. And for 2015 we have always said that we are going to manage our CapEx according to business conditions. So I would expect that we would be somewhere between $20 million and $30 million with maybe the bias being towards $25 million to $20 million if business conditions were to stay as they are now.

Okay. And then just lastly, could you talk a little bit about in the US market where you are still seeing flattish volumes?

Where are you seeing the main source of disappointment on a year-on-year basis vis-a-vis your plans that you had a year ago? So obviously I think the mix argument with you guys is largely played out, but where is it that you're still seeing these pockets of disappointment

Well, I think in terms of end markets as we've said, it's just been really uneven. If Class 8's up then agriculture is down, if oil and gas is up then mining equipment is down.

So across our end markets where we have strong positions it's just been very uneven. Even shipbuilding in 2014 was not what we thought it was going to be relative to 2013.

So when we look at it, we're really waiting to see how again our bread and butter industrial and industrial fabrication plays out as we move through March and really through the, I'd say the, important quarters now of the year which take us from April through Thanksgiving before we start to see seasonal weakness.

So oil and gas certainly has reversed course. I think that's been well reported. Heavy equipment is seen through mining, which you know all too well, still weak.

And hopefully transportation will remain strong and we'll see good CapEx spend in industrial equipment and fabrication. And we'll see non-res recover which will have a good pull effect.

Okay. Thank you.

Luke Folta, Jefferies.

The first question I have is on the very position and just how we think about gross margins heading into the first quarter. I think the low point over the last 10 quarters or so is in the low 16s but clearly the price declines that we've seen are far sharper than anything we've seen over that timeframe.

And if we look at back to as long ago as perhaps the second-half 2011, there's potential in a negative pricing environment for margins to be quite a bit lower than where they have been. I think it was in the 14s in the second half of 2011 and you guys have done a lot to fix the -- to change the business profile since then. So given all the changes that you have made and with this amount of price decline, how do you think Ryerson will respond to the price changes that we've seen from a gross margin perspective of FIFO in the first half?

So let me take the actual fake costs out of that. So let's take the metals purchasing side of that and I'm going to kick it over to Mike and Kevin for some commentary on the pricing side. But what I would say on the material side is again I think we are very good at managing these cycles.

You can go back to 2013, even though the pricing downdraft I think is greater than it was in Q2 of 2013, which I do think is an instructive reference point, our margin growth is real. I think we are better buyers and we are better prices and we add more value to every pound in our Company.

That said, margins are forming a bottom now and I don't see that bottom reaching the margins that you referenced in 2011 of 14%, 14.5%. So we are forming a bottom now and we are hopeful that demand will pick up consistent with what people are prognosticating and that we will be able to reset this margins and we'll actually see margin expansion and we will see the benefits from our continued transformation, which I think is important but it is somewhat clouded by just the power of macro events.

Right. Thinking through the timing of it and how it's just been a very quick decline, are you saying that basically that I imagine it has to be below the 16.1% in 2013 just given the rate of decline but you are saying it is closer to that number than it is to the second half of 2011 is where it is bottoming out?

I wouldn't cite an exact number. What I would say is that I would say 2013 is instructive in terms of looking at Q2 and just looking at how those margins flow throughout the year. And I would say that we are very good at managing our inventories towards replacement cost and then looking at our book of business as to how that is priced in terms of the business that we pursue.

And in terms of timing, again November and December saw that downdraft. I think it is continuing in January and February. So I think as we move through Q2 we start to form that bottom, if you will and look to grow margins beyond that point.

Got you. Okay. All right, and then on SG&A, decent further improvement this year. SG&A levels coming down with sales coming up.

How should we think about what your initiatives are in 2015? Clearly there are some headwinds early on in the year. What can we expect from that perspective?

Mike and Kevin, do you have some thoughts on that?

So expenses are obviously a core component of how we run our business. And one thing I would like to point out is if you look at our results over a period of time I think you're going to see that we manage mix expenses through good times and bad times. And the structure of our SG&A and all the different components that drive costs are certainly in focus today but we are not going to do something radically different due to something because we don't have to because we manage them time after time and so obviously we've got our eye on them.

We'll continue to have our eye on them. We're going to be appropriate but at the end of the day we like our expense position and we are going to stay that way. Kevin, do you have anything to add?

No. The only thing I would add is in the softest area for us is oil and gas, which is really Texas and Oklahoma.

Fortunately last year when it was strong it was a tight labor market so we had lots of overtime and that is something that you can just turn off the spigot immediately and then any layers that we have relative to temporary employees. So the variable cost side of the business it adjusts with volume and we've done a lot of work on the footprint in terms of repositioning the actual square footage of the platform.

Okay. I guess shifting gears to the market a bit, a component to how long this de-stock goes on for relates to just what the import pressure continues to be. Can you give us a sense of what you are seeing out there in terms of import offers and how long you think this current elevated trajectory extends out?

Import deliveries are certainly peaking in the fourth quarter and even through the first quarter of 2015. Everything we hear is that import delivers are peaking and at the same time those import deliveries are peaking the actual orders placed for import are falling and I think the data supports that.

So we have seen spreads between import and domestic narrow. They've come in significantly so for example, hot band spreads are really between $20 and $40 depending on freight and where you get it. And even plate spreads are now between $60 and $80 and galvanized is probably between $50 and $80.

So really spreads are becoming less attractive and even for folks that made what they thought were advantaged import buys in Q3 and Q4, saw those advantages erode. As the material actually delivered whether the leadtimes were 10 weeks or 16 weeks, those advantages certainly eroded by the time of delivery.

So I think the approach to import is to be selective by category. And I would certainly expect in this environment if prices remain where they are domestic versus international, and the dollar can certainly influence that. But looking at capacity utilization rates we would anticipate speed that import deliveries, import orders and the rate at which those orders are placed going to decline unless spreads start to go out again and demand picks up significantly.

Okay. Thanks a lot, guys.

(Operator Instructions) Sam Dubinsky, Wells Fargo.

Just a couple quick ones. Your model is pretty CapEx light. Just to be clear, even if prices stay where they or maybe get a little worse for non-carbon products, do you feel comfortable you can generate free cash flow?

We do.

Okay, great. And also just a clarification, your pricing in carbon was flattish quarter over quarter despite ASPs rolling over for the industry.

Was that mix or maybe just some are color? Do you turn down low-margin business, or is this just how the mix panned out?

It would be a combination of both. I think moving well beyond the fourth quarter of 2011 we are just evaluating business and you know there's two types of business in the industry.

There is contract business and there's spot transactional business. And some of those contract that come up, certainly in carbon sheet, when we do our margin heat maps, carbon sheet is a lower margin product and when you really look at the economics of every contract, when you include payment terms whether it's 90 days, 60 days, even 120 days you look at committed inventory amounts and the actual margin against the cost to serve, it's just not a profitable business.

That said, there is business that is profitable for both parties and we continue to book that business. So I think from a macro perspective in the quarter prices peaked in Q4 but underlying material costs were increasing faster. And I do think that -- as those contracts played out we did see some margin compression.

Okay. And then just high level, what do you think it takes to turn the market better? Just because import spreads are now low, inventory I think is starting to work through the channel.

Is it just a confidence game or do you need demand to pick up, or what to think the number one -- or maybe mill outages -- what do you think it is that causes people to say now is the time to start buying product at a reasonable price? Just because if you look at pricing, it doesn't seem -- it seems like it's way worse than demand. Demand is actually not looking nearly as bad as pricing.

Right. So Sam, it's all relative but I think people have been scolded and scarred over just the last four years of just the gyrations in year where you've got four months up and then six months down and two months up and five months down. It's been really apoplectic and I think people have tailored their business models to that.

So they will buy to their backlog. Even when inventories went up, as you saw, I think we all had expectations of better demand in the second half of the year, particularly the fourth quarter. And you saw inventories grow to 3.3 months versus an average of 2.6 in the industry.

So there is inventory overhang now that is being worked through the channel. And it's going to be demand, Sam. And I think it's going to be demand not just in the US but it's going to be demand globally and the US that is going to help correct that situation.

Okay. Then just the housekeeping question. LIFO adjustments in 2015, how should we think about that?

Erich?

For 2015 as prices continue to be downward we would expect to have LIFO income.

All right, can you maybe just give us some magnitude just as it moves the model a decent amount?

Yes, you could look back at historical pricing kind of see where our LIFO went. We also split our pools by carbon, stainless, aluminum. So it's really difficult to get a true overall calculation on what to expect for 2015.

Okay. Thank you very much.

(Operator Instructions) Tyler Kenyon, KeyBanc Capital Markets.

A lot of my questions have already been answered but just wanted to drill down just on the carbon steel volume weakness both sequentially and year-over-year in the fourth quarter. And it would seem pretty reasonable to assume that OEMs are very hand to mouth just given the fallout we have seen in pricing.

But anything regional or product specific there that you could share with us? I know oil and gas has been a weak spot for you just like everybody else but anything you can provide there would be helpful.

I think it is certainly end market specific. I think Kevin and Mike can provide some good color on that regionally.

So carbon specifically if you are referencing the MSCI, if you look at the shipments in the MSCI something like 65% of it is carbon flat roll and in that automotive is a big end market. We do not play at all in that end market. So when you think about carbon steel for us it's really into these industrial markets that we are talking about including oil and gas.

Yes, Kevin I would echo everything you said on that. When we look at our carbon flat roll business it is a product line that is a big piece of our portfolio. But we also keep an eye on our long-term strategic ship that we are chasing.

And so there's a lot of focus these days on trying to provide a higher value-add content product. And at times some of the high-volume programs that might be for automotive or similar industries might be going at margins that are not necessarily attractive for what we are trying to accomplish.

Okay, thanks. Appreciate that.

And then just one last one here. Any hard-line inventory reduction goals that maybe we should be thinking about here in 2015 and the cadence of that as well?

I would say that we certainly are in the mode of generating countercyclical cash flow. We've used a target that we've shared in the past that is 75 days, which is a place we like to get to in these types of conditions.

But we are not absolute. I think we take a look at opportunities as they present themselves and certainly want to manage well within the cycles that we are presented.

But we continue to drive our transformation in our Company. We like our team, we like our cohesion, we like our doubts.

We see positive changes taking place within our business and within our business model. Certainly wish that it would be more strongly validated by macroeconomic factors. That said, we continue to see the progress within our business and we will manage the cycles well.

Thanks, guys. Appreciate the color.

And it appears there are no further questions. At the time I would like to turn the conference back to Mr. Eddie Lehner for any additional or closing remarks.

Thank you. As I discussed, Ryerson has made significant progress as we transition our product mix, establish competitive differentiation in the marketplace and create a foundation for growth and enhanced profitability. Thank you for your interest and we look forward to speaking with you next quarter.

That concludes today's conference. We appreciate your participation.