Ryerson Holding Corp (RYI) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to Ryerson's first-quarter 2016 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 Corporation's first-quarter 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, one of our two regional Presidents in charge of North American operations; and regional Chief Financial Officer, Jim Claussen, who is standing in for Mike Burbach, our other regional President responsible for North American operations, who is attending his daughter Megan's college graduation, will be joining us for Q&A. We congratulate the Burbach family and Megan on her achievement.

Before we get started, let me remind you that certain comments we make on the call will 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; the cyclicality of the various industries that we serve.

Forward-looking statements provide our current expectations or forecasts of 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, 2015.

In addition, our remarks today will refer to several non-GAAP financial measures, including some that exclude LIFO expense or income that make adjustments for certain items such as impairment charges on assets and gain on debt retirement. 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 first-quarter 2016 earnings release filed on Form 8-K yesterday, which is available on the investor relations section of our website.

With that in mind, I'll turn the call over to Eddie.

Thank you, Chris. It's a pleasure to be here this morning to talk about Ryerson's first-quarter performance. First, let me thank my Ryerson colleagues for a job well done. I have not seen it done often in our industry whereby selling prices decline and industry shipments contract, and yet our margins expand by 300 basis points; our expenses go down by 6%; our inventory turns in under 75 days; and our EBITDA is higher year-over-year.

So, four out of four ain't bad. In fact, it's really good. When we add to the recipe continued market share gains and meaningful debt reduction year-over-year, our positioning and upside operating leverage portend a Ryerson optimistic about its near-term and long-term future.

Our success continues to be about our customers, the right strategy to serve them, our people, and our execution as we emphasize speed, scale, value-add, culture, and analytics to provide great customer experiences time after time. And now, with signs of stability and improvement in the metals pricing environment, our financial results show what we are capable of delivering as an organization -- especially through the lens of difficult industry conditions.

For the first quarter of 2016, we achieved our guidance for adjusted EBITDA excluding LIFO. We continued to gain market share, improved our gross margin, effectively managed expenses and working capital, further reduced debt on our balance sheet, and posted earnings of $0.42 per share.

Against a backdrop of a continued decline in average selling prices, we generated a 300 basis point improvement in gross margin excluding LIFO compared to the first-quarter 2015, as our average cost of materials sold excluding LIFO declines faster than average selling prices. Supply chain and price book management were excellent through the quarter.

On the expense side, we exceeded our expense reduction target and further improved our operating leverage with a reduction in expenses per ton. In the first quarter, we generated cash flow from operations of $47 million due to positive earnings and industry-leading working capital management.

Using the cash flow from operations, we reduced total debt by $47 million or 5% in the quarter, including the repurchase of $25 million principal value of our 11 1/4% notes for $17 million, resulting in a gain on debt retirement of $8 million. Year-over-year our debt reduction stood at 18% as our net debt came in at $902 million. We also made the decision to exit the joint venture in Brazil, which was underperforming, to further enhance Ryerson's intrinsic earnings stream and streamline our portfolio of service center assets.

Additionally, we have expanded our commercial and service bandwidth through our redesigned Ryerson e-commerce store and website. Now registered customers and visitors can buy metal online from Ryerson's expanding metal superstore and make credit card purchases 24 hours a day and seven days a week. New features will be added to our Ryerson e-commerce platform throughout 2016 as we further evidence our commitment to providing great customer experiences across Ryerson's extensive service footprint.

In terms of pricing, carbon has been trending upward since the beginning of the year after stabilizing late in the fourth quarter of 2015, with a Q1 increase in benchmark HRC prices up 15% from year-end 2015. Benchmark HRC, cold-rolled, and galvanized sheet prices have continued moving higher through the second quarter to date, supported across multiple indicators including scrap prices; slab and billet prices; international prices; as well as pending and decided trade cases. Whereas carbon prices led the way in Q1 and [less] far in Q2, aluminum stainless prices have started moving higher as well on lower year-over-year LME warehouse inventories, curtailed output, trade case filings, and prices that had reportedly fallen below the majority of primary producers' cash costs of production.

While global industrial activity as measured by PMI indices has shown contraction in China, Canada and the United States for at least the last several months, March figures indicated faint expansion in both the United States and Canada manufacturing economies. Additionally, first-quarter US GDP figures show the overall economy to be expanding at a very low and slow rate of growth.

Macro and market activity reflects this slow rate of growth, as does the most recent ISM Report for April that noted inventory destocking and improving order trends but a still subdued manufacturing environment. That said, there are recent indicators that growth in Europe and China is stabilizing and trending higher while the US moves into its presumed stronger GDP quarters of the year after weak Q1 2016 GDP readings.

Given weak but improving PMI rates and lackluster GDP growth, the service center industry still faced headwinds on the demand side. Service center industry shipments contracted again in the first quarter of 2016, down 8.5% from the year-ago period.

In that context, Ryerson's 0.4% year-over-year tonnage gain with strong margin expansion illustrates self-help borne out of sustainable progress through execution of our business plan. Ryerson did not trade market share for gross margin amidst declining industry shipments.

Looking a bit deeper at specific end markets, trends are mixed. The oil and gas market continued to decline; commercial ground transportation weakened as well, with notable declines in Class VIII truck builds and rail investment; industrial machinery and equipment, metal fabrication, and machine shops are mixed, depending on whether levered to consumer or heavy industrial uses. At present, end markets tied to the consumer doing better, while end markets tied to resource extraction and transportation are contracting. Nonresidential construction is a bright spot, as is defense and food processing.

Contributing to the stabilization and improvement in pricing have been successful trade case determinations and lower import levels. As the carbon sheet cases work their way to finalization, there have been new cases filed in stainless sheet and carbon plate.

Given the overall trade and political climate at present, probabilities are on the side of continued affirmative trade case rulings and stronger enforcement regimes following these decisions and recent trade law passage, such as the TPA and the ENFORCE Act.

Although we are acutely aware of the recency of hyper commodity deflation and surplus global capacities in commodity and basic material production that have weighed heavily upon our industry, Ryerson's momentum is building, and our execution is strong. I want to again thank my Ryerson teammates for putting our customers' success first and living the inscription on our blue wristbands of: say yes and figure it out to the fullest extent.

With that, I'll turn the call over to Erich, who will discuss the highlights of our first-quarter performance.

Thanks, Eddie, and good morning. As seen in both the income statement and balance sheet, Ryerson made significant progress in the first quarter of 2016. While average selling prices per ton continued to decline, shipment levels showed market share gains as we grew volumes 8.4% sequentially and 0.4% year-over-year.

Gross margin increased to 21% in the first quarter of 2016 -- which is a record high since Platinum's acquisition of Ryerson in October of 2007 -- and up 370 basis points year-over-year. Gross margin excluding LIFO was also a record high at 18.9%, a 300 basis point increase over 15.9% in the first quarter of 2015. The improvement in gross margin resulted from our cost of materials sold per ton declining at a faster rate than the decline in average selling price per ton. Turning inventory quickly is the key to generating cash and managing our investment in inventory.

In the first quarter of 2016, days of supply improved to 74.5 days compared to 82.6 days in the year-ago period. Warehousing, delivery, selling, general and administrative expense was down $7.1 million year-over-year in the first quarter and exceeded our annualized $20 million cost reduction target that we announced last November.

Earnings per share was $0.42 in the first quarter of 2016 compared to a loss per share of $0.08 in the first quarter of 2015 and a loss of $0.64 per share in the fourth quarter of 2015. Excluding a gain on the retirement of debt and impairment charges net of tax is reflected in a reconciliation included in the earnings release schedule, adjusted earnings per share was $0.26 in the first quarter of 2016 compared to $0.15 per share in the first quarter of 2015 and a loss of $0.46 per share in the fourth quarter of 2015.

As Eddie said, we used our strong cash flow to further reduce our debt. Our debt balance decreased to $977 million, and our net debt balance was $902 million at March 31, 2016. We maintained solid liquidity during the first quarter.

As of March 31, 2016, borrowings were $250 million on our primary revolving credit facility, with additional availability of $240 million. Including our cash, marketable securities, and availability from foreign sources, total liquidity was $313 million, a $40 million improvement since December 31, 2015.

Now I'll turn the call back over to Eddie to conclude.

Thanks, Erich. As I said last quarter, we've never felt better about how we are positioned as an organization, with clarity of purpose and a shared commitment to our industry vision, our customers, and our stakeholders. We are also encouraged by the metals market in repair and recovery.

Although there is a lag effect between announced mill price increases and service center price realizations, we expect to see higher metals prices through the balance of the year, based upon emergent supply-side trends continuing. Consequently, we anticipate adjusted EBITDA excluding LIFO within a range of $50 million to $55 million for the second quarter of 2016, with further upside to adjusted EBITDA excluding LIFO continuing through Q3 of 2016, should recent pricing trends sustain and move through the supply chain over the balance of the year.

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

(Operator Instructions) Brett Levy, Luke Capital (sic - CRT Sterne Agee).

Eddie, Erich, congratulations on a great quarter, and also congratulations on the outlook for Q2 and apparently Q3 as well.

You guys gained market share. Can you talk a little bit about why you think that happened? Who is fading? What are you guys doing right and they are not doing right? And I don't want you to give away your trade secrets or anything like that, but clearly you're doing something to accomplish this, and any color around that would be welcomed.

Yes, Brett, so first thing is: Ryerson customers, if you're out there, thank you. And Brett, what I would tell you is we've done it more on the transactional side, which is really good news for us. And I'm going to let Kevin expound on that a little bit, but we've seen really good growth on the transactional side, which really fits up well with our strategy.

We continue to make really good strides and gains on the program contract side. But clearly, coming out of the Q4 and really in 2015, when we started to see sustained pickups in market share, they sustained for the first quarter of 2016. And it's been led by strength in our transactional business, which really means we're getting at the fragmentation of the industry in a manner with which we are pleased. Kevin?

Yes, I would just echo what Eddie is saying. What's really encouraging is it's very broad-based geographically and not concentrated to one end market. But I really think it's a result of -- well, you can't discount culture, but we spent a lot of time connecting the network so that inventory is visible across the entire Platform. And then we've also made significant investments in new capital equipment that is starting to take hold.

So it's not one thing; it's really a lot of things coming together. And the other thing I would say is that the senior leadership team is spending more time in the field than we ever have in the past.

And this is more of a housekeeping kind of thing. Is there a new computer system or something along those lines that's sort of making this possible? You mentioned this sort of 24-hour credit card availability and that sort of thing. Is that somewhat unique to you guys?

And just generally, what is the 2016 CapEx guidance? And how much of it is in the technology?

Brett, we've made investments in systems. Analytics is a core and foundational part of our strategy. We're not talking about spreadsheet analytics; we are talking about robust analytics, similar to what people are reading about what's being covered in the popular press right now.

In addition to that, our e-commerce platform -- we just came out with a refresh of our e-commerce platform on ryerson.com. And I'm hoping that you'll actually make a credit card purchase today, Brett.

(laughter) I wish I was building something big enough.

And Brett, this is Erich. As far as our CapEx budget for the year, we always look at a budget of somewhere between $15 million and $25 million. Based on our performance, we'll flex up or down, depending on what our needs are. So that kind it gives you a typical range of where we're at: $15 million to $25 million.

And Brett, one more point of punctuation to your question is: we are investing in growth CapEx when we can acquire a unique processing capability that has high value-add and high margin. We're also investing a lot of time and effort in mapping supply chains and connecting supply chains so that we can actually map to and take friction out of the supply chain by developing strong relationships with partners that are in processing, partners that have inventory that we may or may not carry. But we also believe that investments in the supply chain mapping are very beneficial today and going forward.

And then, you know, we're an interesting market here just from an M&A standpoint, and what you guys are doing may be a little bit unique. Is the build option or the buy option in terms of, like, moving into new markets with those new service centers and investing in inventories a more compelling way to go? Or is sort of bolt-on acquisitions of existing guys a better way to go?

And then, lastly, I'm just borrowing from the Russel Metals conference call; they said that their M&A plans include bolt-on acquisitions in Canada and the United States. And so you guys are coming up on some maturity dates, and I know you're thinking about that. But I mean -- I also think that guys like Reliance and Russel, you know, they are sitting on a lot of liquidity. Are you getting some M&A inquiry? And I know I'm going to get only a diplomatic reaction to that.

Maybe start with the first part of the question in terms of how you grow. Is the build option or the buy option more attractive to you at this point?

Brett, it's not either/or. I mean, if you look back at the last year, not a lot of people did acquisitions in 2015, and we did one at the tail end of 2014. And we did another one in 2015. They tend to share common attributes where we don't really believe in paying for holding gains in inventory. And we don't believe in paying for huge amounts of goodwill that aren't really substantiated by unique and differentiated capabilities.

That said, we have an active pipeline. And we look at deals all the time, more of the bolt-on variety. But we look at them all the time. And we have an active pipeline. And when we can come to terms with one of those, we'll look forward to that announcement.

And then just last question, I promise, and then I'll be back in the queue. What are you guys thinking about your 2017 and 2018 maturities?

Brett, there's been some really good data points in the market over the last 45 days. And I think most of the callers know what those data points are, so I won't repeat them here. Given Ryerson's performance, and the fact that we're a seasoned credit, and we are performing well, and we have very high expectations for ourselves going forward, I have to believe there's a lot of people out there that will feel the same we do. So we'll see what happens.

All right. Thanks a ton, and congrats on the good quarters and outlook.

Jorge Beristain, Deutsche Bank.

Congratulations on the nice quarter. It's nice to see positive EPSs.

Amen.

And I just wanted to ask a few questions. I guess just -- could you talk broadly as to what you see happening in the competitive landscape? Because simply put, like you said, MSCI numbers are down so sharply year on year, yet the publicly listed companies like yourselves are basically holding the line. So that's the first question. And then, secondly, why would you pursue M&A in an environment where it does seem like your competitors are sort of naturally leaving the building?

Yes, so Jorge, we'll take them in reverse. With M&A, we are selective. I mean, if something is compelling enough, we'll take it forward. But we think we have really good opportunities organically. We like our strategy very much. And if something is very compelling within that active pipeline, we'll look to act on it. But we don't feel any urgency other than to do something that's really good for Ryerson and its stakeholders.

With respect to what's going on with market share -- and I'm going to let Kevin and Jim certainly append to this answer -- there's a couple of things going on. And I think Jim Bouchard made some really intelligent comments about this. Relative to what happens when the industry contracts, and we get really acute deflation, and people manage to that -- and a lot of people are trying to hang on and survive and get through that. And then you come back up on the other side, and you find out that you have bare spots in inventory. A lot of competitors, especially smaller competitors, may have a hard time filling complete order requests. They can only fill partial requests, so they have bare spots in inventory.

And then they've got a working capital build coming up on the other side that's pretty significant as prices rise the way they appear poised to rise. That presents challenges, too. Once they burn through their floor stock, as they've priced below replacement cost, they have a big working capital amount to come back up on the other side.

So it's two things: one is more sustained in terms of, I think, strategy and the execution of that strategy, which we're very proud of. I think the other thing is going to be more short-term, and we'll see if it turns into something longer-term, where people become stretched for working capital. And smaller service center companies are either going to have to fund inventory investment privately, or they're going to have to work with their ABL lenders to see if they can get additional ABL capacity.

And I'm going to go ahead and kick it over to Kevin and Jim to add to that.

It's Kevin. The only thing I would add to that -- I think Eddie is right on -- is this is the first time in a couple of years that supply has been relatively tight in some products. And so in the past, where some smaller distributors that maybe were not aligned with any particular mills strategically would be able to jump in and out of the spot market and get tons on very short lead time, and what we're seeing right now is as mill lead times have extended -- and in some cases, I mean, mills -- I'm not going to use the word allocation, but for sure there are certain categories that are tight on supply that that material is not easy access for smaller distributors.

So we're definitely seeing some holes out there and capitalizing. And that is obviously playing to our favor in terms of market share.

Thanks. In terms of -- you mentioned that working capital -- how are you guys going to manage your working capital needs better than your competitors in a rising price environment? And have you budgeted for use of working capital in the second half?

Yes, I think -- so, Jorge, look, past is prologue. And so I think if you look at our prowess in managing working capital, I think you've seen over time that we've done it very well on the way up and on the way down. And we expect we'll do it very well on the way up again.

And proof is in the 75 days. That's not an easy thing to do. I mean, I think there's sometimes this feeling that inventories just manage themselves by some kind of invisible hand. But I can assure you that the supply chain organization at Ryerson today did a phenomenal job through the second half of the year and through the first quarter.

It's Kevin. One other thing I would add: Eddie mentioned in his opening comments about speed and access and visibility, and I mentioned it in my comments about how we were growing. But the visibility also works on the inventory side, because now that we've connected the entire platform, and we can see inventory down to the SKU level across the entire country, it's a lot easier to balance out inventory and move things between locations. And then we've got the transportation, of course, to get between our locations.

So we are able to flex up and down pretty quickly. We've got weekly supply chain calls to talk about the environment that we're in, to decide what kind of position that we want to take in any given product. So it is very dynamic, but it's also very analytical.

Okay, thank you.

Joel Tiss, BMO.

I wonder if you could do your usual -- a little more granular run-through of some of the different end markets and give us a flavor of what you're seeing, what the industry is seeing?

Sure. We'll go a little deeper than the script. So let's just take it sort of seasonally first and just say that we think as we get through Q2 into Q3, we certainly think we'll see the best quarters of the year. We do see some budding growth drivers out there. Construction is getting stronger. We see end markets levered to the consumer getting stronger.

Of course, you know oil and gas is still very weak. We know ag is still weak, although there's been some signs that maybe ag prices are coming up, so there may be some momentum building there. We know heavy machinery and mining are still very weak vis-a-vis CAT's recent announcement that they thought there was a bottoming, but still weak. Auto is strong; aerospace is strong, as you know.

And when we look at -- and I'm going to go ahead and kick it over to Kevin and Jim for a more granular look at the end markets. But in general, there's also a secular piece of this I'd like to point out. Because in doing a lot of reading in terms of prepping for the call, there's a realization, Joel, that people don't want to drink leaded water; and they don't want to see trains derail; and they don't want to see bridges collapse; and they don't want to see roads decay. And so we've been underinvesting for a long, long time.

And when you read the St. Louis Federal Reserve Bank's report on what this period resembles most from 2009 through 2015 into 2016, the period it resembles most is 1929 to 1941. And I think we all know what that period of time was like.

And so we've been underinvested in, really, the US's physical capital for a long time. You're even seeing people come out now like Carl Icahn, like Warren Buffett, that are talking about this idea that investment has been very weak and sub-par. And manufacturing has been underutilized for some period of time.

So we think there are catalysts that are starting to emerge for secular growth improvement in manufacturing and in physical investment. And with that, I'm going to go ahead and turn it over to Kevin and Jim for a more granular look at what's going on in specific end markets.

This is Jim Claussen here. Just to tag onto what Eddie said, we are certainly starting to see some signs of investment in infrastructure, highway signs, bridgework, things like that that are good positive signs we're seeing. And then we are also, speaking a little bit geographically, seeing some nice improvement in some industrial sectors up in Eastern Canada.

Okay. And just can you help us -- I don't know if you normally guide to a free cash flow number or not for the year; I guess you might give us some pieces that we could figure it out. But I just wonder if you could give us a ballpark of what you're thinking for the full year?

Yes, it's very difficult to forecast the cash flow through the entire year. It's going to be dependent upon how high prices go. So from looking at prior years, you can get a gauge and a sense of when prices are increasing, what type of cash needs we need to build into the working capital. So for the full year, there will definitely be a build in working capital. But how much it's going to be is going to be dependent on prices.

Joel, just for perspective, it was only two months ago when most people had a target on hot band of about $400 to $425. And I remember it was somewhat controversial when we said that we saw hot band going $450. So now that hot band is on its way to $650, everybody is busy updating their models pretty frequently.

So let me just give you this hint that I think will help. And that just is that on balance, that Ryerson -- really, for every dollar of liquidity we can support about $6 to $7 of revenue.

So -- and this goes back to Jorge's question. We feel good about our ability to manage on the way up. And one other point I'll make, too, is the price increases that have been announced -- and you look at the lag between when they're announced, and when they start to find their way, they propagate their way through participants' income statements -- that really hasn't happened yet. So it's going to be a late second-quarter, third-quarter, and fourth-quarter event. And that's pretty well baked into the next two quarters.

I mean, we'll see what Q4 brings. But at this point, when you look at the import numbers that are trending towards $2 million and the decreases in the carbon sheet categories, this isn't going to unwind itself in an instant. So this has some room to run. And we feel really good about our ability to manage it.

Great. Thank you so much.

Justine Fisher, Goldman Sachs.

The question that I have is on how trade cases affect imports and steel pricing. So we know that the preliminary duties have already been levied on tonnage. And I guess -- I mean, I guess -- I don't know if every ton is now subject to that, or if people just aren't ordering imports, because if the final determinations are made, then they'll be levied retroactively. But can you explain to us just a little bit more about how the mechanics work? Because if it's only preliminary, is every ton facing that duty now?

And maybe a question that might help us understand this: let's say that the levies -- and I don't think this is a base case, but let's say that the levies are not approved in the final determination. What then happens to import prices?

Well, okay, Justine -- so let's take a hypothetical that that is a possible outcome. I don't see it as being the probable outcome, but let's just take it as a possible outcome. And that is the preliminary determinations are reversed, or avoided, or nullified in some way. And if that happens, then I'm sure you'll see imports go up.

In imports -- if you look at the range of imports now, we've seen imports at 20%; and we've seen imports in a month, I think, go all the way up to, I think, 45% to 50%, which would have been early in 2015/late 2014 time frame. So certainly if that were to happen, imports -- I think the probability, because we don't deal in absolutes, we can only deal in probabilities -- the probability is imports would go up.

However, let me tell you what's different about this time. What's different about this time to me, and I know opinions differ on this, but what's different about this time to me is that it's not just one thing. I mean, look around the world at all the trade complaints that have been filed already, and the ones that are being evaluated and considered for filing around the entire world. Then look at actual legislation that's been passed in Congress, which is new and unique through -- you know, vis-a-vis the TPA and the ENFORCE Act.

And I think if you look at the organization of the industry, particularly the steel industry in this country, the way the producers are organized in filing these cases and supporting these cases -- they are a united front. And I think they've been effective. And I think the entire effort, if you will, has been effective. And I think it's going to continue to be effective until we get to a better approximation of what people believe is fair trade.

One of the things that's really interesting is that the United States has run a trade deficit for 41 years. Since 1975 we've run a trade deficit. The goods and services deficit in 2015 was $532 billion, and the goods deficit alone was $760 billion. And the two countries that had the biggest surplus were China and Germany. And not coincidentally, they seem to have growing and very stable middle classes.

And so when you look at the climate of this country right now politically, and you look at what people believe is the plight of the middle class, you could argue that our trade deficit maybe is out of balance, and that some of these things need to come back into balance. And people's sensibilities and their actions are slowly starting to reflect that. So I do think that it's a different time. And we'll see how lasting it is.

Okay. Thanks, Ed. So when people say that trade cases have reduced imports, it's not -- is it the fact that there are actually levies now? Or is it the threat of future levies being applied retroactively that has just been more of a deterrent?

Well, the preliminary duties -- correct me if I'm wrong, but the preliminary duties get collected. And then they're refunded if the determinations are reversed, I believe.

Okay.

So that's number one. Number two is critical circumstance has been levied against certain countries that were determined to be egregious offenders of the trade laws, whether it was with respect to anti-dumping or countervailing duties.

So these are real things. And the enforcement regimes are getting stronger, Justine. So we think this has legs.

Okay. Great. Thanks very much.

Phil Gibbs, KeyBanc Capital Markets.

I had a question on the transactional business. I know when you became public, you were about equally split. You had a lot of program or contract business, and you probably at that point had about 50% transactional. Where do we stand right now? Where is a good longer-term target?

And secondarily, how much of your business right now is more than just brick bulk versus some level of value-added processing? And then also where do you anticipate that to go over the long term?

Yes, thanks, Phil. So I'm going to kick this over to Kevin and Jim in just a second, but let me say this. I mean, in terms of transactional, let me tell you that we like both. They're two different businesses, okay?

Program contract is more of a supply chain management solution; and transactional is -- do you have it? Can you get it to us? Can you get it processed? And can you do it fast at a competitive price? And can we transact, and can we get off the phone? Or can we transact via email and get it done?

And of course transactional tends to be a smaller order size. Program contracts -- they tend to be bigger order sizes, managed over longer periods of time, with maybe more complex supply chains.

We like them both, Phil. We like them both; we do them both well. But if you asked me what's happened over the last, say, 9 to 12 months, transactional has pulled ahead of program contract by about, say, 500 basis points. So you'd be looking at something that looks more like 55%/45% right now. Okay? And then I'm going to kick it over to Kevin and Jim for some more color.

Phil, the only thing that I would add is just by the nature of contract business -- and Eddie is exactly right; we talked a lot on the commercial side, and I attribute this to the growth and the fact that we are outpacing the MSCI in significant ways, which is a reversal of fortune for us -- is that we're not a company of ors, but we are a company of ands. And that is we want to grow transactional. We want to grow program. Name the product.

But by the nature of contract business is -- you tend to get a heavy concentration in certain end markets. So you kind of go up and down the rising tide net of market share gains. What's happening in this environment, with the industry being so weak, is that by having our tentacles in so many different places on the transactional side, those customers tend to move in and out of end markets. And they're much more flexible. So you can offset some of the macros.

So I don't think there's any blend that we magically want to go get. But we absolutely need to grow in both areas. But it takes a different skill set. And a lot of the things that we've been talking about on this call and prior calls, in terms of this speed, and visibility, and the right inventory at the right place -- if you look at our footprint, we can get almost anywhere in this country within 24 hours. And so it's a very flexible model in terms of being able to deliver by having the inventory in the right place.

Thanks for that color. Eddie or Erich, whoever would like to take a stab at this one: I know someone like a Nucor or Reliance take a view of where they think prices are going to be at the end of the year, and then they true-up their LIFO as the year goes on. I think you have a little bit of a different approach with the accounting terms of how you measure that on maybe a quarter-by-quarter basis or inventory positioning.

So can you explain to me, relative to the LIFO outlook you had before, which I think was nil -- you had a $15 million credit here -- and what we should expect as prices rise here into the second quarter, given the way that your accounting is set up? Thanks.

Thanks. I'm going to start that I'm going to kick it over to Erich to talk more about the accounting aspect of it. But let me just say this: LIFO for us in the first quarter was great. I mean, I think it shows that we turn inventories quickly, and we are able to get our purchase costs down. And so, I mean, LIFO for us in the first quarter was a badge of honor. And we're glad it wasn't mill.

So for us that portends lower average cost in inventory as we move through price increases in Q2 and Q3. So that was managed very well by the team here at Ryerson. And in terms of the accounting, I'm going to let Erich talk more about that.

Sure, Phil. This is Erich. LIFO accounting -- I love LIFO accounting. It's great, because it's such a difficult topic for a lot of people to understand.

The big difference for Ryerson is that our LIFO is calculated as of the end of each quarter. We don't do a forward projection to the end of the year like a lot of our peers do. So from that perspective, it's very simple for us to basically say: what's our inventory that we have on hand? What were the prices? And then we calculate the LIFO income or expense based on that.

As far as going forward, again, everyone is projecting prices to increase. From that perspective, we would expect to have very little impact relating to LIFO expense in the short-term, because we did record a lower cost or market charge. So we are expecting to generate some LIFO income going forward, not expense, even though prices are rising. And that's the current short-term look over the next quarter or two.

Thank you.

(Operator Instructions) Ken Monaghan, Amundi Smith Breeden.

Congratulations on a well-done quarter. Well executed. Can you comment on change in customer behavior with regards to their inventory in particular, given what's going on on longer lead times and stocking issues with the mills, and how that's impacting your business right now?

So, Ken, right now it's a positive catalyst for us, because we have inventory. And if you give us a purchase order number, we'll take your order right now. (laughter)

So we have material, and we are well stocked. And I think what's happened in the industry, though, is people got caught with bare spots. And I think customers -- and I understand the behavior; you can be a little bit skeptical. When prices run ahead like they have, you're going to be skeptical, and you're going to wait as you are going through a destocking cycle.

It took a long time for inventories to clear the channel at the end of 2014 and 2015. So there was a lot of destocking. But what delayed the destocking was it was hard to find clearing prices that were above the historical cost of inventory. So people didn't want to sell at that great of a loss.

But as demand is contracting, you know, that's a vicious cycle down. Once they were able to clear some inventory and get through their floor stock and actually generate some cash, now they've got to come up on the other side. And they're short inventory. And then as you look through the customers and how they would view that, they're probably a little bit shocked right now by the speed and magnitude of the increases that are being forced by the mills.

The mills are pretty united on this. We haven't seen any holes in the mill armor in terms of enforcing these price increases. So I think customers now are -- well, we know customers are accepting that realization that prices are going to go up. And they need to buy, at least to support their backlogs, if maybe not even -- and probably even consider a mild long position at this point. And I'm going to go ahead and I'm going to have Kevin and Jim add to that.

The only thing that I would add is we don't see customers building inventory right now, but we are certainly watching it closely. And it's pretty compelling to not let your inventory fly out the door at the current average cost, considering where the replacement cost is going. So we run the business, and we think about pricing in terms of where mill costs are going. But as part of that is a lot of education to our customers, so that they know what to expect and they don't get caught short as they bid projects. But a long answer to an easy question is: we do not see customers building inventory right now.

Okay. You have touched on your competitive position and kind of M&A activity earlier in the call. You know, in the trade rags there seems to be a number of companies that are on the ropes.

Can you talk about what you're seeing in terms of -- and how much of your market share improvement you may attribute to kind of loss of competitors, and guys kind of just falling by the wayside because they haven't been able to handle the downturn, and now they are getting squeezed on the way up with working capital issues?

Ken, so the second part is more of what we would consider to be an emerging trend, which is -- that's what's happening now. And so we're certainly going to be very interested in how that plays out when we look at market share gains going forward.

That part about being caught short of inventory, not having inventory, not having working capital to support the build coming back on the other side -- that's what's happening now. It's a more recent event. As we go back into 2015, and we look at our market share gains in 2015, which -- we started just stringing consecutive months together of market share gains, we think that's a better business model. We think we're doing a better job competing. We think we're doing a better job for our customers.

And I mean, every day, Ken, you and I have talked about this before. There's more than 1 million customers in our industry that place more than 80 million orders a year. And when we look at our addressable end markets, we can participate in about [50] million of those orders. So there are literally thousands of elections going on every hour, and people are voting with their dollars. And I think we're just getting more of that.

Lastly, have you done more in terms of balance sheet management since the end of the quarter, and specifically -- and with more repurchases of your bonds?

Ken, I don't think we can talk about that. But certainly we're pleased that we were able to buy back the [elevens] throughout Q1.

Okay. Thank you.

Thanks, Ken.

Owen Douglas, Baird.

A lot of good questions have already been asked, but I just wanted to better understand a bit in terms of what you're seeing in that program contract business -- whether you think that you're seeing the ability to take additional share gains? Just any additional color would be appreciated.

Sure. Kev?

Yes, Owen, the answer is yes. We -- give or take we have a dedicated sales force to go after that program business, it tends to be higher level negotiations. You've got to work out a working capital plan in terms of specific inventory management that tends to be index-type pricing that resets.

And I'd say the common theme is it's customers that have multiple locations. And they want to negotiate with one company, and they want to have the deal spread across the entire platform. And if you look at who's able to do that, obviously that plays to our strengths.

So, yes, we have picked up share in the program aspect of the business. And a lot of that is because of the specific dedicated team that we have.

Owen, two things that have happened is -- one is the sales cycle on program contract business is long to begin with. It's certainly a lot longer than transactional. And a lot of those contract bids got rolled over or got extended given the volatility in pricing in the market.

So where you would typically have six-month renewals or one-year renewals, a significant portion of those contracts got extended to 12 months and 18 months so that customers could really get a better line of sight on the volatility in price. And so we think that that environment is going to be more active and is going to be -- there will be more business in play as we come up to 2017.

Okay. So if I were to think about the evolution of that contract business, do you see any sort of margin movement one way or the other as these contracts come up for renewal?

Well, the bias right now would be for those prices to go up, just based on where CRE pricing has gone. So if you were to extrapolate that and say that that trend was going to continue, then prices would presumably go up.

Right. I was thinking, sorry, about the margin impact. And you said it was sort of a index-based piece. So are you just thinking in terms of lead lag impact?

We're thinking about both. Both are in play. So it really becomes a timing exercise, but both are in play. You would expect to see gross margins go up for period of time, and then they would plateau. And you'd expect nominal prices to go up over a period of time as well.

And Owen, obviously it's been working the other way in the last couple of years. So these same programs have been resetting on the downside, where you've got higher cost inventory going into a lower cost environment. So that's compressed margins on the way down. And then we would expect the opposite coming back up. But it's very specific in terms of the structure of any individual contract and how that resets. But the theme that Eddie just went through is exactly right.

Okay. And just in terms of thinking about the current days of inventory on hand, you guys mentioned you got it down to 75, which sounds like a pretty good number. Is that the level which you want to maintain on a go-forward basis? Or was there just really -- you guys able to move a lot more of that inventory to meet customers that were in need?

Our view is when it's advantageous for us to make investments in inventory, we will. So we're not -- we have stayed in a range between 75 and 90, one 92 days, over the last four to five years. And where we can make advantaged buys in inventory, we would consider that to be an investment like any investment. So working capital investments can sometimes be very advantaged and very attractive. And when they are, we may go little bit long on inventory.

But certainly in a deflationary environment, where every replacement pound you buy is cheaper than the one you bought before it, you want to move your organization towards turning those inventories faster, throwing off cash, and being in a position to replace cheaper. So I would say that we employed the right tactics, and we executed very well through Q4 and obviously through Q1.

Okay. So in the current environment, should I then take it to mean that you guys will be looking to go a bit longer in inventory in terms of absolute tons?

I wouldn't say that necessarily, but we'll be opportunistic. If there's opportunities, then we'll take advantage of them. If not, we'll maintain very prudent working capital practices, as we always have.

Okay. Thanks very much, guys.

(Operator Instructions) Ned Hole, Putnam Investments.

Just on the guidance, what pricing bid HRC, stainless or aluminum, are you assuming in there?

Ned, I'll tell you, we wouldn't go into those specific model assumptions on the call. But let's just say that we are assuming that -- let me say this: there is strength in stainless sheet, and there's obviously strength across carbon sheet. And there's less strength -- even though prices are going up in SBQ bar and carbon plate, there's less strength in those categories. And aluminum is what I would call neutral right now. So certainly there would be a pull-up effect across carbon sheet and across stainless sheet.

Okay. And on carbon sheet, like, how much of that is actually baked at this point, given we're hearing order books out till June and July in a lot of cases?

It's just starting to get into -- it's really just starting to propagate through the value chain now. It'll start with the mills, of course, but it will start to propagate through to service center price realizations as well.

So that will pick up momentum. And if you had to look for -- if you wanted to call a peak right now, it would be Q3, with some strong tailing-out effects in Q4 before things start to level off. That's the view right now.

And then changing gears, just on the bond buyback: how much is left on the authorization at quarter end?

We've got the ability to buy back bonds under our debt agreements right now. It's more or less based upon how much of our availability that we want to use rather than it's a restriction.

Okay. I thought that you had a bond, or excuse me, a Board authorization to buyback a certain number of bonds. I thought that was $100 million?

Yes, Ned, that's correct. But, I mean, that's a fluid situation. If we have the ability to buy bonds, we have a great Board and a supportive Board. And so that's something we could evaluate quickly and we could act on if the opportunity was there. But yes, that authorization is where you stated it is.

Okay, great. I appreciate the color, thanks.

Phil Gibbs, KeyBanc Capital Markets.

Phil, you're doing an encore.

Thanks again. As long as I have the energy and the questions, I figure why not, right?

Right.

Import spreads across carbon, stainless, and aluminum generally -- where is the tightness? And where is there some pockets of arbitrage right now?

Sure. So really there's more opportunities in common alloy aluminum. There's some opportunities in stainless sheet and stainless plate, but less than there were before the trade case was filed.

As you know, Phil, the action has really been in carbon. And carbon is down significantly, down 29%, 29% and 21% across HRC, cold-rolled, and galvanized. And even the countries that can start to gap that just don't have the capacities to really do that meaningfully in a short period of time.

In addition to that, some things that were late in developing such as European hot-rolled coil prices -- they were slow to move towards China HRC prices. But the two are really at parity at this point. So those two numbers support about a $545.50 HRC number minimum US.

So when you look at ArcelorMittal's announcement, for example, where they, I think, said they were really taking orders at $610 for July, that was at that time I think $80 above CRU. So it's pulling the CRU up.

That said, we just don't see -- number one is we don't see a lot of import offers right now. Number two, the spreads are just not that attractive. You can do some things; if you really are motivated to do it, you can find a little bit of daylight in cold-rolled. You can find some daylight in carbon plate. But there's just not a lot of compelling reasons right now to import.

What about on the carbon longs side?

The thing about carbon long is you've got so much material in depots, and you've got so much availability. And you can turn that working capital quickly and not tie up working capital or letters of credit. So even given those spreads, it's not that attractive.

Okay, thanks a lot. Keep the analytical moneyball going.

It appears that are no further questions at this time. I'd like to turn the conference back to Eddie Lehner, President and Chief Executive Officer, for any additional or closing remarks.

Thank you. Ryerson's improved performance across our income statement and balance sheet reinforce that our strategy and our execution are on track. Thank you for your interest in Ryerson. We look forward to speaking with you next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation.