Ryerson Holding Corp (RYI) 2015 Q1 法說會逐字稿

Good day and welcome to Ryerson's first-quarter 2015 earnings conference. 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 Corporation's first-quarter 2015 earnings call. I'm here this morning with Mike Arnold, Ryerson's President and Chief Operating Officer; and Eddie Lehner, Executive Vice President and Chief Financial Officer; and our Chief Accounting Officer and Corporate Controller, Erich Schnaufer.

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 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 for forecasted future events. 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. 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 excludes LIFO and certain other 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 President and CEO, Mike Arnold.

Okay. Thanks, Chris, and good morning to everybody. Over the past few years, our priority has been implementing a corporate transformation that improved our cost position, increased our gross margins, and, of course, enhanced our competitive position in the metal service center industry.

And we've witnessed the benefits of the transformation in our financial results over those past several years. Beginning in the fourth quarter of 2014, those efforts continued but were more than offset by the industry dynamics and the deflationary pricing which occurred in that quarter continued in the first quarter of 2015. The commodity metal price environment was the worst we've seen since 2009.

At the same time, demand has been mixed. Some of this is the result of customers waiting on the sidelines for lower prices. But we are seeing some strength and some weaknesses in the various markets that we serve. And with lower-than-expected industry demand in the fourth quarter of 2014 and into 2015, there has been widespread inventory destocking, which has put some additional pressure on margins.

While market conditions weighed heavily on our performance for the first quarter, we were pleased with the way we managed factors that are under our control, namely expenses and inventory. First-quarter expenses were down slightly year over year and sequentially. And led by a 10% reduction in inventory levels, we generated strong countercyclical cash flow from operating activities of about $100 million.

We've had experience managing through the ups and downs of the metal cycle. Throughout, we have maintained a control of expenses and inventory and we will continue to aggressively align our inventory and expense levels with metals pricing in metals and market demand.

At the same time, we have continued to identify and implement strategies that capitalize on Ryerson's competitive advantages and continue to be excited about our future. In the past, we talked about how Ryerson is using technology to link our approximately 100 locations so we can bring our global capabilities to each local market. We also have an e- commerce platform that makes Ryerson easier to do business with and sets us apart in the metal service center industry.

We also see opportunities to leverage Ryerson's strength and enhance growth opportunities through market segmentation. We are targeting select end markets that draw on Ryerson's existing expertise and credibility, broad product line, and geographic presence and our value-added fabrication capabilities and quick-turn delivery.

As you know, at the end of 2014, I announced my intent to retire in 2015. And this morning, I'm sure you've all seen we've announced that the Board has completed its process and has named Eddie Lehner as the next President and CEO, effective June 1. This certainly reflects the strong succession planning and talent management that we've put in place at Ryerson and absolutely assures a smooth transition as I retire at the end of the month.

You all know Eddie. So it's my pleasure to turn the call over to him. Eddie?

Thanks, Mike. Mike, before I get to my remarks, I want to thank you for your leadership and mentorship these past three years. The time allotted doesn't allow me to share all I have appreciated and learned from you. But rest assured, we will put it all to excellent use.

Mike referenced a challenging macro environment, characterized by an oversupplied global metals marketplace and significant base metal price deflation. As we work through deflationary impacts to our income statement and balance sheet, first-quarter sales were essentially unchanged year over year and sequentially.

Tons shipped per day were down 5.9% year over year and down 2.1% sequentially. The average selling price per ton was up 5.6% from the year-ago period. Sequentially, the average selling price was down 1.1%, which was notably less than the underlying commodity price decline, as mix shift benefits and pricing discipline helped ease the impacts of margin compression in the quarter.

Ryerson's gross margins were compressed by a significant inventory devaluation cycle. Sequentially, we saw commodity cost declines of 21% in hot-rolled coil, 9% for aluminum, and 14% in nickel.

While Ryerson's margins on a GAAP basis were up sequentially and year over year, gross margins, excluding LIFO, declined to 15.9% compared to 16.4% in the fourth quarter of 2014 and 17.9% in the first quarter of 2014.

As deflationary cycle countermeasures dictate, we aggressively managed inventories lower to speed the alignment of average-cost inventory with current prices. And signs are emerging that prices are bottoming, with nickel rebounding from its lows, iron ore moving off of its recent lows, and indications of hot-rolled carbon sheets forming a bottom, with several mills attempting price increases.

During the quarter, we took a non-cash charge of $12.3 million to recognize the decrease in value of Ryerson's investment in A. M. Castle. That amounted to $0.23 per share after-tax.

As a result of these operating and nonoperating factors, we reported a net loss attributable to Ryerson Holding Corporation of $2.5 million or $0.08 per share in the first quarter of 2015. Excluding the impairment charge on this investment, earnings per share would have been $0.15 in the first quarter of 2015. That compares with net income attributable to Ryerson Holding Corporation of $4.8 million in the fourth quarter of 2014 and $1.6 million in the year-ago period.

Adjusted EBITDA, excluding LIFO, was $35.9 million in the first quarter of 2015. That compares with $40.1 million in the fourth quarter of 2014 and $53.2 million in the first quarter of 2014.

Inventory days of supply for the first quarter of 2015 was 82.6 days, down from 88.3 days in the fourth quarter of 2014. With a $76 million or 10% reduction in inventory levels, we made significant progress bringing inventories in line with demand and we will look for additional opportunities to reduce inventories, improve turns, and accelerate the movement of average-cost inventory to replacement cost.

We continue to make progress toward the deleveraging of our balance sheet and improving our capital structure. As of March 31, 2015, borrowings under our primary bank revolving credit facility stood at $407 million, with additional availability of $23 million. Including our cash and marketable securities balances, total liquidity was $332 million.

We repurchased $30 million principal amount of our 2017 and 2018 notes in the first quarter. They were purchased at prices between $101.25 and $102.50, well below Ryerson's current call premiums. For the quarter, we reduced total debt $57 million or 4.5%.

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

(Operator Instructions) Brett Levy with Jefferies.

First off, Mike, thank you for your excellent service over the last three years in this real turnaround situation. You helped take the Company public, and I think a lot of the people who are stakeholders are thankful.

Eddie, congratulations -- well deserved. This is a challenge that you deserve the opportunity to have.

Brett, thank you. Hey, make sure you ask Mike a lot of questions and give him a workout. All right?

Do my best. Listen, there's a lot of price increases being announced left and right in flat rolled. Are you seeing order books building? Are you seeing the signs that this might possibly stick?

From an order book standpoint, Brett, I would tell you that as we look at the various industries, we are seeing a whole mix. I would tell you that I don't see any reactive activity in the marketplace, because customers have been able to, to a certain extent, sit on their hands for quite some time and just wait for the next pricing move. There's ample capacity and availability in the short term, obviously from the sources.

So that hasn't been a big what I'll call realization at this point that there's some surge in the order book to beat future price increases. I think everybody has watched the last six months, seven months and nobody has been right in their predictions.

We play at very close to the belt, as you know, and we talk a lot about how we manage our business. Lead times are short coming in and going out. Either way, we are able to respond very quickly to our customer needs. And so we're not going to react one way or the other, even building up inventory, anticipating better prices, or better demand.

So we have built a capability, both from an IT, order examination, daily looks at order books that says we stayed very short and very flexible, especially in the cycles at this point. So I can't tell you that I've seen anything that is remarkable in the industry at this point.

All right. And then in terms of the bond buybacks, are you guys done? Has there been anything done subsequent to this reporting period?

And then you are in an interesting scenario, where you have some call dates dropping to prices that might actually lend themselves to a refinancing, especially in the face of posting reasonably strong numbers in a -- you said flat was down 21%, aluminum down 9%, nickel down 19%. If you can post good numbers in that scenario, I think it's understandable why the stock is up.

What is the thinking in terms of bond buybacks? And then also starting to address refinancing opportunities as you approach your call dates?

I thought you were going to say we were happy, because we finally did it. Brett, as we said in the last call and we said on prior calls, we just want to be at the ready. We want to manage and position our business so that we have that kind of optionality and as opportunities present themselves, we can look at them and put our best foot forward.

Got it. In terms of aluminum, can you talk about where you see the import levels coming in? Are you guys participating in the higher level of imports? And do you think that Midwest premiums slide further from the current levels?

I'll take the first stab at that. So Brett, the Midwest premium in fact is way down. If you think about where it peaked to where it is today, it's down 50%. I think that although demand -- certainly I can't say demand is terrible. But I think that demand certainly isn't enough to absorb what is, in general, just an oversupplied market of metal.

What has changed, though, is that I think some of the domestic -- if you look at Alcoa, Novellus, Aleris, they have all positioned themselves to take advantage of aerospace plate, automotive aluminum sheet. And I think more and more common alloy has matriculated offshore.

So I think there's a structural change in import patterns and aluminum surrounding common alloy aluminum. It's not that the domestic producers don't want that business, it's just that I think strategically they are positioning themselves for higher value-added end markets. So I think there's somewhat of a step change in imports for aluminum around common alloy.

And this is a tougher question. On the A. M. Castle write-off, should we assume that at some point you are just going to divest these shares? Just what is your strategy, because there is still a holding at this point.

You would know, Brett, we can't comment, obviously, with regards to long term what our intention will be. It's similar to the past. We made that investment for specific reasons as to potentially an opportunity there long term. We are constantly reassessing that.

And as you know, there's a lot going on at A. M. Castle today with some of the changes that have been made. So we will continue to assess that investment over the long term.

And I know that you guys did not give guidance for the second quarter and it's hard to have that much visibility. But we are about halfway through. Does it feel like things in the second quarter directionally could be up, down, or sideways relative to the first quarter, based on what you've seen out of one week of May and all of April?

Yes. So Brett, this one is easy for me, because I won't be on the next call, so I can say anything I want to say. So I would tell you that sequentially looking at the quarters, we are more positive on Q2 versus Q1. So our thought process is that at least sequentially, we'll see better results.

As we've come through April, I can't say we had any parties over the volume demand out of the market place. But some early indications in May are for a stronger market. So we are again optimistic that Q2 plays out better as we move through the quarter. But so far, that's what we have been seeing.

All right. Thanks very much, guys. I think that's enough questions from me. I'll get back in queue.

Luke Folta with Jefferies.

Congrats to both of you. I just want to follow up on Brett's 11th question there regarding the second quarter. The margin -- I guess when you think about the improvement sequentially, are you expecting a higher margin in the second quarter than the first quarter? I'm just trying to understand how pricing flows through on the flat rolled side. [I mean at] that price.

It's mixed right now. I think in this quarter, if prices don't take another step down -- as I noted, there's been some -- we've seen prices come off the bottom, certainly in nickel. Aluminum has probably been the most stable of the three; it has been.

But really, I think once prices turn up, we can really get a better view of when that margin reset is going to take place. And really, the sooner the better. But certainly, the price declines, given that they've really flattened out and hopefully demand picks up through the quarter, that we will start to see an acceleration towards margin expansion. But it's just the visibility right now just isn't very good.

Okay. All right. I guess on that point, you took a whole bunch of inventory out of the system in the first quarter. I'm sure that goes a long way to help you in terms of margins in the second quarter. When we think about working capital from here, would you expect additional cash generation or a neutral impact, holding top line constant?

Yes; it comes in two steps, Luke. I think the first step is to get your volumes in line with demand, and we did that. And then the next step is when you start to see that big step down in average cost and you get that second release of working capital as your average cost falls.

So we are still in the midst of that. So our inventories still should come down on an average cost basis and then we would expect to still generate cash flow out of inventory.

Okay. And can you remind us what your expectations for pension and OPEB cash needs this year -- and next, if you have a view?

Yes. We are expecting $43 million of contributions to our pension plan and roughly $9 million for our OPEB plans.

Okay. And do you have a view on what that does in 2016 at this point?

We still expect to have reductions in our pension contributions, maybe in the area of $5 million to $10 million lower.

Okay. All right, guys. And last one -- Eddie, I got a strategic question for you. I think you guys have done a very nice job over the last several years in terms of maintaining and improving the margin profile. And to some extent, that has come at the expense of volume as you exited some less profitable business.

As we move forward -- and this year might not be the right year to talk about volume growth. But as we move forward, how should we think about how you are going to look at that trade-off between volume growth and maintaining and enhancing margins? I'm just trying to get a sense of, two years, three years out, how should we think about where your volumes could end up?

Yes, Luke. So I think if you look at this quarter, and there's just a lot of smoke in the quarter, especially from the impacts of price deflation, inventory devaluation, and demand that's really mixed, if you think about where most of the strength has been, and it has been well noted, it has been in aerospace, it has been in non-res construction, certainly in automotive.

And you know that our market shares are not that high in those end markets. So as we've talked about our story over the years as being levered more towards late-cycle end market recoveries, we still expect that spend to occur. And we will be well positioned to grow our share in those end markets and the verticals that we have been targeting.

Our strategy is right. It's good. It's just that we've really not seen a growth in our end markets as of yet that you would have seen in past cycles. And I'll let Mike append onto that.

No; it's your show now. But you know, Luke, I think the key thing to our strategy has been -- and obviously transitioning to Eddie is just excellent because, one, he gets it. He has been a part of it and he understands the pros and the cons of going after volume for volume's sake.

So I anticipate that is the organization moves forward, we will continue to look for those opportunity in the higher-margin shapes that we produce, the additional processing that we have added to the capabilities into the Company, and so we will continue to look for those value-added opportunities on attractive shapes.

But probably more important now -- and Eddie will wind up talking much more about this, I think, in future quarters -- is some markets that we are assessing now, end markets, that we don't have a lot of participation in, but we think are great fits to those capabilities that we've put in place and will foster future growth.

So there's going to be this combination of some markets that we may not have participated in as strongly by bringing all of this, what we have created at Ryerson, which is really this kind of global capability brought down to the local markets through all of our tools and the scale that we have, fostering hopefully higher-than-industry growth rate in the products that we've chosen to focus on as we move forward.

Now, what that looks like as a total industry in tons versus MSCI, I can't tell you. Because, as you know, I've never lost any sleep over that one way or the other, as long as I've felt that we were growing market share in the places that we chose to grow. And that has been critical.

So my anticipation would be -- and so it's a little bit of message for Eddie, right -- but part of -- obviously, as a shareholder, my expectations long term for Ryerson obviously would be to certainly stay on that path. Because I do believe there is enormous attractive growth in places that we can compete very well and add a lot of value and expand those margins continuously and we don't have to, quote-unquote, chase a lot of volume to do it.

Luke, in this quarter in particular, we were successful in managing our balance sheet really well. Our expense control was good; our inventory management was excellent. And -- but we weren't the only ones that were trying to raise cash.

And I think when you are in that type of environment, what obscures your longer-term view and your longer-term objectives is, in this type of environment, people do what they have to do to take orders. And we know that there were some orders, certainly, that were taken throughout the industry that were just taken at levels that you just -- for us, we can't participate.

So when we look further out, we've mentioned fragmentation in this industry. And the fragmentation is enormous when you think about really 80 million to 90 million orders that occur in this industry every year.

So our real objective has to be to keep approaching that fragmentation with a better business model, whether it's alternative sales channels such as e-commerce, our call centers, things that we've done to get at that fragmentation map supply chains. Because we know that when a customer calls us, if we can see it and it's available to us and we can price it and quote it and deliver it within the service window and do all that before the customer hangs up the phone, we got a really good shot at that order.

Great answer, guys. Thanks a lot. And again, congrats to both of you.

Jorge Beristain with Deutsche Bank.

Again, congrats to Eddie on the new position. And congrats to Mike on all the good work. My question is just on carbon steel. The stock is reacting very positively, given good performance in a really ugly macro environment.

Could you just talk about carbon steel realizations on a per-ton basis? They were almost flat sequentially in a really down market versus spot. Can you just talk about how much of this was based on you guys stepping away from business, maybe? So maybe it was mix? Or is there some timing issue there that there could be some flowthrough into the 2Q on lower realizations?

I would really commend our region presidents, our multi-market GMs, and the entire Ryerson team. I think they did a very good job of managing that trade-off in the price book and really working through a lot of the segmentation routines that we put in, in terms of understanding our customers, what they like to buy, how they like to buy, and really making good decisions in those trade-offs throughout the quarter as to what business to take.

And when I say what business to take, it's really what business to quote and where to quote is at, because it's a very fluid market. And we are not the only ones that are competing for business. So I think the field did a wonderful job in managing the price book in the quarter.

Do you expect any follow-on into 2Q as carbon prices catch up with the market? Or do you think that this marks the bottom and we are actually starting to see an inflection up in realized pricing?

Look, we'd like to see the price increases take hold. We'd like to see demand support those price increases and people start to order to their backlogs. And if that happens, I think it gives us a good chance to inflect back up again and start to see margin expansion.

Okay. And then just maybe a strategic question. You mentioned that we have not yet really seen the kick-in effect on your late-cycle markets where you are targeting. Could you reiterate what those are?

And then just how should we think about M&A in a market where if we do see an upturn in steel prices and then there's going to be a lot of stress in the industry on working capital, how you guys could see further consolidation? Would there be any opportunities to cherry pick and further enhance those end markets that you are targeting?

Let me talk about the markets a little bit and then I will kick it to Eddie on the acquisitions and the M&A environment, in particular, for the future. As you know, and we talked a lot about this with you all and on the road show, our industry base that we sell to is the meat-and-potatoes industrial.

We talked a lot about this is everything from the general industrial equipment, machinery, some of the on-highway stuff, but that's in classic trucks. Things that move -- rail we are participating in. We are growing in the marine side of the business.

We do a lot in the heavy equipment: so heavy construction equipment, mining, ag, the off-highway. And then electrical machinery, which can be any kind of electronics, appliances, those sorts of things. Then of course, we had been increasing our position in oil and gas.

So those are typically the markets that we participate in and do very well in. The strength of those all have been the transportation markets, as you know. You can see that. We've seen it both sequentially and also year on year significant growth continuing, in particular, in the Class 8 trucks. So that has been good.

Year on year, the rest of them have not been attractive. But sequentially, we've seen some pickup at least for fourth quarter. Now you got to put that all in the context of our revenue and what we are selling and what was going on through the fourth quarter of last year and get people sitting on their hands, not wanting to put inventory in, and letting prices drop.

But those are the areas that we have targeted. What we are now doing is peeling back the onion in each one of those industries to understand what all the subsegments are. Because there's a lot of places where we bring enormous value and especially with our value proposition now and our ability to bring all these capabilities to the local market maybe better than anybody else might be able to do long term. And that will still play out in the marketplace.

But we are finding subsegments of areas that we just don't participate in at all. And in many cases, it's as a result of the types of products and shapes that they were buying, which now are strategically important to us but before weren't and therefore, we didn't have much penetration.

So we've actually created inside our organization now what we call vertical market, organizations that cut across the Company that are focused on some of these markets, in particular. And so in coming quarters, we will begin to talk more and more on these calls with regards to what's going on in those specific markets and as we move forward.

So we will still talk about shapes; we will still talk about aluminum, stainless, and carbon, because you all want to converse with regards to that. But we will now begin to start talking about packaging equipment and trailers and different markets where we are finding interesting niches that are looking for our capabilities. And we have those on a broad basis that we are bringing to the local markets where a lot of these customers are.

So I think strategized -- I don't think -- and I'll flip it to Eddie, but certainly as we've talked on the calls before, markets like aerospace has always been interesting to us. We think that's an M&A play. We've actually grown business in our aerospace business.

But to really become a player in there, it would have to be some M&A work. And the other two markets that are strong right now, we really haven't established a position, nor have intended to establish a major position. So Eddie, the M&A side?

Yes, sure. So Jorge, you will remember we acquired Fay Industries at the end of the year, which was a really great bolt-on for us. And what we're seeing in the M&A market really follows suit, where there are smaller deals where we can add capabilities in our multi-markets. And those are the deals that are holding up well.

Some of the bigger deals, where the EBITDA has become lumpy, business has been really mixed. What's happened is we've seen valuations collapse and the gap between what we can pay and what the seller might want has become too wide, because they are experiencing stress in their business as well.

So the opportunities in our funnel right now are more towards the small bolt-on side. But again, we keep that funnel well stocked and we are always looking at 8 deals to 10 deals at any time.

Thank you.

Justine Fisher with Goldman Sachs.

And I echo the all-around congratulations. The first question is just specific on the bond buybacks. Have you guys disclosed or could you disclose how many of each bond you bought back?

We've bought back $17 million of the 9%s and $13 million of the 11 1/4%s.

Okay, thanks. And then my second question is just on the import environment. And I was wondering, do you think imports are interesting at this level? And what do you think is the right premium that stays off imports to the US?

And then following up on that, someone phrased it on a previous earnings call, so I'm going to plagiarize it. But they said that it's not a matter of the US stopping imports, but it's a matter of other countries stopping their exports to really solve the problem. And do you guys feel as though there's just going to be this overhang of price pressure in the US as long as the tide of exports from other companies isn't necessarily stemmed?

So there's a lot of factors in play right now, as you know. And so what I will do first, because I know that this question will be coming, and so I'll go ahead and I'll just put this out there that the spreads that we are seeing right now are $10 on hot rolled sheet and about $75 on carbon plate, about $300 a net ton on stainless, and about $240 a net ton on aluminum.

So when you look at those spreads, what I would say, Justine, is that the trend has definitely softened on import intensity. People were still taking deliveries, obviously, in Q1, even through Q2.

The order rate of imports has slowed, because it's starting to look more like 2013 was, albeit at a higher level of imports, just because I think the mills are -- frankly, I think the mills are still trying to figure out how they want to respond to it. And we have a wonderful domestic supplier base that we look to first.

But I do think that this starts to look like 2013, where you really have to go into specific categories where there is still a wide enough spread when you look at first importing into various coastal locations. And if you are really selling against an import price in coastal locations, you really have to stay competitive. But when you get inland, that spread has to go up by $30 to $40 when you get done with the transportation and handling.

So I think overall, the trend is down. I think it will stay down, unless factors change from where they are right now. That said, there still seems to be opportunities in cold-rolled sheet; there's still opportunities in hot dip galv and still some opportunities in plate. And then on the nonferrous side, it really just depends what your supply chain is overseas as to how much you bring in.

Okay, thanks. And then my last question is just on the overall growth/leverage profile. I know that you guys have now spoken about getting into some new end markets, which I think makes a lot of sense if the existing exposure is a lot to mining and other sectors that may not be as high growth.

But if people are looking from a high-level view at the leverage of the Company and saying, okay, well, what really needs to rev up EBITDA in order to get the leverage down to a lower level, do we really need to see that volume pickup increase? Or do you think there's enough to be done on the margin side with new business wins, etc., to make a meaningful difference in leverage?

Justine, a couple things that I would tell you. Obviously, any top-line growth leads to bottom-line growth because of that operating leverage that we've built in the business. So we will never turn away from the fact that either an economic recovery, the strength of the late-cycle markets that we serve, or penetration increases, where the margins are good and it's business that we want long term won't be a significant health, in fact.

But that's something that in most of those that I just said, we can't bet on them. Right? They are not necessarily controllable. So the thing that we've continued to do is to shift that mix of our business.

Because when you look at the business that we don't quite like and the business that we really do like and we are moving, we look at 600 basis points, 700 basis points, 800 basis points difference margin-wise on basically selling a different shape to the same customer or it could be selling to different types of customers.

And analytically, we are laser focused on continuing to change that mix. So without any top-line growth, we know that, except in a condition like we've seen over the last six months with the deteriorating pricing and it's just out of control, we know that we can continue to expand those margins by what we do. And that's what we proved through the transformation.

But coupling that with accelerating the top-line growth is really the secret to this whole thing. Right? So we can do all these things internally. We can continue that margin movement and expansion, and it's very attractive and it improves the bottom line. And we don't have to chase the volume.

But at the end of the day, that volume has got to come on the top side. And we think that both with the late cycle recovery, some recovery in the US markets, better behavior on the pricing, as we have already talked a lot about, and then the tactical things that we are doing internally to find new markets, customers who want to do business with a company who can bring it all to them in any location, at any time at quick surface, and connect it all electronically and digitally so they can do business with us 24/7 -- that's really going to fuel some growth. But we still got to get through this conundrum of the cycle that we are in.

So it's a combination of the two. And I'll tell you I don't think we will leave either one of the two. So they both got to go together. Long term, they got to go together. And that's what's really going to create enormous shareholder value.

Great, thanks so much for the color. I appreciate it.

(Operator Instructions) Joel Tiss with BMO.

I wonder if the mix of inventory that was liquidated had any impact on the earnings or the profitability.

No.

Okay.

It was really getting those inventories in line to where demand was.

And where you are now, that's pretty much the right place to be? Or you think there's more to go?

Well, it depends on where we go from here. But I think, as I said earlier, it looks like it's the average cost piece now, with that falling is where we are going to get additional working capital release.

And we are really tactical at this point in terms of looking at our inventory positioning. We want to support our service levels and we really want to support our customer backlogs. But you look at what has happened in certain end markets, like oil and gas, for example, where you just have such a steep, steep decline in demand. And you really have to work through those inventories and you don't need to do a lot of replenishment there until you can sell those off and then get really near to replacement cost.

Have you guys given us a free cash flow estimate for the full year?

We have not.

Okay. Any chance of getting a ballpark or it's too early?

Not today.

(Laughs). All right. I guess, Mike, you still have work to do. You said he was going to answer all the questions. (laughter)

We need some more people to jump in the queue.

And then I just wonder if, a little more formally, if you could run through a bunch of the end markets. You've given us little bits and pieces. Maybe some of the strengths and the weaknesses within the end markets, just to help us balance it out?

Sure.

Thank you.

So far -- I'll just take it sequentially, because that's kind of, I think, real time now what's going on in the industry. So obviously, the transportation that I talked about before in Class 8 truck -- that continues to be strong. It continues to be good and it's a good place for us to participate and we got a nice position.

We are starting to see the general industrial equipment pick up. We saw some early numbers on industrial machinery from the industry that we were scratching our heads at a little bit, because it seemed to be much stronger than the actual demand in the marketplace.

So we are seeing sequentially that begin to pick up. Fabricators are beginning to get active again, which is our first indication that people are outsourcing and they are starting to ramp up some production in areas where they may not be bringing all their people back, but they're outsourcing. And so the fabricators are starting to pick up. And as you know, that's a big part of our business.

And then, at least, we think the electrical machinery has stopped the degradation. We saw year on year that being down. And so as we saw sequentially coming out of the fourth quarter, at least that's coming to kind of a flatness. And so we would expect the demand to start to come up in there.

And then of course, as you know, oil and gas -- you know far more about it than we do. But we've seen the impact in the central part of the US and down through Texas and Oklahoma, etc. But that's not a huge part of our business.

So, so far, that's what we're seeing. Then when you break it down out of the heavy equipment, you still see the lagging in mining. You know what's going on in ag. I don't think ag is at the bottom yet. So they are probably in for still another tough year and then we will start to see them come back up and out.

But interesting -- when we look at a couple of those industries, as those industries have continued to degrade, it looks like we may be picking up some penetration with the customers that we do business in, because our numbers are not down as much as those industries have been, even as we come sequentially out of the quarter.

So some bright spots, but we are still cautiously optimistic. I would say that this late-cycle recovery is going to come in much stronger at some point. But that's what we are seeing, Joel.

Awesome. Thank you very much.

Phil Gibbs with KeyBanc Capital Markets.

I had a question just on how the FIFO gross margins per ton trended through the first quarter and how you are seeing those trending into the second quarter.

Yes, so on a trending basis, they were certainly trending down in the first quarter, started to -- on a FIFO basis, started to flatten out. And then again, as Mike pointed out in his comments, we are starting to see those margins stabilize. And now we are hopeful that with demand pickups through the remainder of the quarter, we will start to see those margins pick up, Phil.

Okay. And then in your energy book of business, any characterization you could give us there as how much it was off, either sequentially or year over year?

Yes. The year on year and sequentially was about the same, which means you still see some degradation. And of course, a lot of it accelerated at the end of the year. So kind of middle teens for us.

Middle teens relative to Q4 --?

Yes.

-- Or Q1? I'm sorry.

Yes.

Okay. And then the 82.6 days of supply that you had in the quarter. Is that an optimal number for you? Or what are your targets for this year or targets longer term as far as where you want that number?

Yes, Phil, I think you know from history, we have been between 75 days and 92 days, depending on the time of year, whether we made opportunistic buys. We've always said that working capital is an investment.

And if it's going to -- if we're going to generate a really good return on working capital vis-a-vis service levels, particular orders that we won, we will make that investment in working capital. Right now, in this environment, we would be more biased to try to work that down some more.

However, we are not against business picking up. And so when business picks up, we will make the right investments in inventory to support those customers.

Okay. Thanks very much.

Aldo Mazzaferro with Macquarie.

Congratulations to both of you. I just had a couple quick ones on the -- I wonder if you can give us some help on the LIFO outlook for the year. I'm just wondering, if prices were to stay flat from here through the second quarter, they would probably end the second quarter down versus the average for the first quarter. I'm wondering, would that reflect more of a LIFO credit in the quarter for you?

Let me just give you a little bit of color on LIFO. What we do is we true up and do a full LIFO calculation at the end of each quarter. So if prices stayed flat, we wouldn't have any LIFO income or expense for the rest of the year.

So it's really going to dictate on what happens with commodity prices, which direction they go, whether or not we would have any additional LIFO income or expense for the year.

I get it. So you take each quarter individually, rather than take the full year and then --.

That's correct.

Yes. Okay. Eddie, could you give us a couple of views on your headcount change? What do you think your normal attrition rate might be over the next couple years?

Yes. What we've done is -- I think we've done a really efficient job of just looking at our footprint. On a variable-cost basis, if you look at our expense ratios, we stack up very well in the industry. So then it really becomes a question of do you rationalize additional footprint.

So very quietly, but effectively, we've gone through various multi-markets. And where we could consolidate branches and still maintain the density and the service levels and the relationships with customers that we wanted to, we went ahead and maybe went from three branches to two branches or two branches to one branch or six branches to five branches.

And that's really -- in this industry, that's really where now you are going to get those cost step downs. And when you do, you invariably lose headcount along the way. So we've been around 3,600 employees plus a component of temps. And it's really going to be more determined now by what we do in managing our portfolio of assets in that footprint moving forward.

Right. The last year, [yes], it's been 3% or so, hasn't it, in that neighborhood?

Yes. And again, that would reflect those consolidations. And the rest of the work we do certainly, whether it's on the fuel side, nonmetal spend, transportation, and material handling -- there are always opportunities there to lean out and get cost reductions that you want. You want that to match your productivity targets.

All right. Thanks very much.

Phil Gibbs with KeyBanc Capital Markets.

I just had a housekeeping question for Erich. The tax rate has been sort of goofy here, but kind of mid-50%s. What do we see the cadence there moving forward? And then if you could give us an update on your NOLs? Thanks.

Yes, sure. So our NOL at the end of the year was $217 million. And as far as our expectations on tax rates, since our pre-tax income has been relatively low, it has looked kind of unusual. But I would expect as our pre-tax income grows, we would have a tax rate of about 39% going forward.

Thanks, guys. Best of luck.

And that concludes today's question-and-answer session. At this time, I would like to turn the conference back to Mr. Mike Arnold, President and CEO, for any additional or closing remarks.

Okay. So as we discussed today, current macro environments still presents some sizable challenges for everybody. We are confident in our ability to continue to manage through the ups and downs of these metal cycles.

I'm sure you'd agree: we continue to effectively manage the areas that are under our control. At the same time, we continue to advance our transformation we are creating at Ryerson that capitalizes on its competitive advantages and laying the foundation for enhanced growth and profitability for years to come.

So thank you for your interest. Thank you for all your well wishes. And Eddie will be speaking to you next quarter.

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