Ryerson Holding Corp (RYI) 2018 Q3 法說會逐字稿

Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ryerson Holding Corporation Third Quarter 2018 Earnings Call. (Operator Instructions) Thank you. Jeff Horwitz with Ryerson Investor Relations, you may begin your conference.

Good morning. Thank you for joining Ryerson Holding Corporation's Third Quarter 2018 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 and Mike Burbach, our 2 North American Regional Presidents will be joining us for Q&A. Before we get started, let me remind you that certain comments we make on this call contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those implied by the forward-looking statements. Such risks and uncertainties include, but are not limited to, those set forth under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made and are not guarantees of future performance. In addition, our remarks today refer to several non-GAAP financial measures that are intended to supplement but not substitute for the most directly comparable GAAP measures. A reconciliation of the non-GAAP financial measures discussed on today's call to the most directly comparable GAAP measures is provided in our third quarter 2018 earnings release filed on Form 8-K yesterday, which is available on the Investor Relations section of our website. I'll now turn the call over to Eddie.

Thank you, Jeff, and thank you all for joining us this morning. I want to start today by thanking our customers who we never take for granted as we look to provide ever greater experiences to the better application of speed, product availability, value add and final mile service.

Next, I want to thank my Ryerson and Central Steel & Wire colleagues for excellent execution throughout the third quarter, highlighted by our acquisition of Central Steel & Wire Company, or CS&W, on July 2, 2018. We welcome our CS&W colleagues to Ryerson as we realized very promising early returns from our collaborative efforts during the quarter. CS&W generated $8.9 million in adjusted EBITDA, excluding LIFO, in the quarter as shipments, pricing, margins, supply chain synergies and operating expense synergies all exceeded our going in expectations.

Turning to the current economic environment. Industrial demand conditions remained favorable in the third quarter of 2018, while metals commodity prices started to decline for CRU benchmark HRC, Midwest aluminum and LME Nickel in the third quarter of 2018. From a demand perspective, the U.S. industrial economy continued to improve incrementally. North American industry volume growth, as measured by the MSCI, increased 4.9% in the first 9 months of 2018 compared to the prior year period. U.S. industrial production as measured by the U.S. Department of Commerce rose by 5.1% in September compared to the prior year, following a 4.9% increase in August, the sharpest growth since December of 2010. Further, U.S. manufacturing PMI remains elevated at 59.8 in September, which is higher than the base expansion measure of 50. While we know trade policy impact uncertainty, the recent volatility of equity markets, higher interest rates and a strong U.S. dollar, along with the prospective plateauing of demand in sector, such as housing and autos, Ryerson's end-market composition and the relative strength of the U.S. economy's current indicators suggest that demand should remain well supported for the broader industrial economy over the next 6 months with average selling price drivers remaining above decade baseline averages. Turning now to end markets. Ryerson showed year-over-year growth on a same-store basis in commercial ground transportation, metal fabrication and machine shops and consumer durable equipment sectors, partially offset by fewer tons shipped to the HVAC, and construction equipment sectors. Sequentially, on a same-store basis, Ryerson grew in the metal fabrication and machine shop sector with flat declining tons shipped in our other end markets, primarily due to 1 fewer shipping day in the third quarter, normal third quarter seasonality and tornadoes that affected our Marshalltown, Iowa facility in certain longtime customers in the Midwest during the latter half of July.

For the first 9 months of 2018, we continued to see encouraging signs from almost all of our key end markets, led by commercial ground transportation, with significantly higher truck build rates year-over-year. Ryerson acquired Central Steel & Wire Company, or CS&W, on July 2, a metal service center with a value brand spanning more than 100 years. Diving deeper into the acquisition, CS&W strengths in long tube and strip mill plate products complements Ryerson strengths in carbon, aluminum, stainless sheet and discrete plate products exceedingly well. Ryerson's enhanced long products portfolio, coupled with our strength in stainless, aluminum and carbon plate, provides even greater value to our customers. The acquisition increased our market share to approximately 5% from just over 4%. Our further strengthened position in long products curves well with our growth investments and strategic acquisitions in bar and tube value-added process and equipment creating an improved structural margin profile moving forward. Further pertaining to the Central Steel & Wire acquisition, we've exceeded our revenue retention expectations, while realizing increased EBITDA margins, supply chain synergies, operational synergies, working capital management synergies and noncore asset sales. Our #1 objective is delivering great customer experiences for our CS&W and Ryerson customers as we work through the process of mapping improved customer solutions through the Ryerson and CS&W network. Overall, Central Steel & Wire generated adjusted EBITDA, excluding LIFO, of $8.9 million in the third quarter of 2018 compared to the $12.3 million earned in the first 6 months of 2018 prior to the acquisition. The long-term objective is for the CS&W brand to generate mid-cycle revenue of $600 million and $50 million in adjusted EBITDA, excluding LIFO, on an annual basis following a post-acquisition optimization process over a 3-year time horizon. We're off to a very promising start so far. Looking toward fourth quarter, we anticipate still favorable demand and pricing dynamics relative to the prior year as U.S. economic indicators remain positive in the manufacturing economy. Overall, we anticipate tons shipped in the fourth quarter of 2018 to decline less than the 7% average decline from the third quarter to the fourth quarter experienced during the past 5 years as measured by the MSCI. With that, I'll turn the call over to Erich who'll discuss the highlights of our third quarter 2018 performance.

Thanks, Eddie, and good morning. Ryerson had another strong quarter with adjusted EBITDA excluding LIFO of $88.7 million, more than twice the $37.7 million generated in the third quarter of 2017. Third quarter 2018 revenues were $1.25 billion, an increase of $385.8 million or 44.6% compared to the third quarter of 2017. On a same-store basis, revenues grew by 24% as average selling prices increased 21% and tons sold increased by 2.5%. Sequentially, sales were $192.9 million or 18.2% higher. Same-store sales were 1.4% higher with an average selling prices up 4.3%, partially offset by tons shipped down 2.8%, driven by 1 fewer shipping day, normal third quarter seasonality and shipment disruptions to longtime customers caused by tornadoes that struck Iowa in late July. Net income attributable to Ryerson Holding Corporation was $77.5 million or $2.06 per diluted share for the third quarter of 2018 compared to net income of $1.7 million or $0.05 per diluted share in the year-ago quarter and $17.5 million or $0.46 per diluted share in the second quarter of 2018. Net income attributable to Ryerson Holding Corporation, excluding the gain on bargain purchase of $73.2 million from the acquisition of Central Steel & Wire Company and restructuring and other charges was $6.3 million in the third quarter of 2018 or $0.17 per diluted share.

Ryerson generated gross margin of 16.7% for the third quarter of 2018, which was 10 basis points lower than the year-ago period and down 80 basis points compared to the second quarter of 2018. Included in the cost of materials sold was LIFO expense of $32.1 million and purchase accounting adjustments of $4.7 million for the third quarter of 2018. LIFO expense of $43.9 million for the second quarter of 2018 and LIFO income of $1.7 million for the year-ago period. Gross margin, excluding LIFO and purchase accounting adjustments was 19.6% for the third quarter of 2018 compared to 21.7% in the second quarter of 2018 and 16.6% in the third quarter of 2017. Compared to the second quarter of 2018, gross margin, excluding LIFO and purchase accounting adjustments was down 210 basis points due to our cost of materials sold per ton, increasing faster than our average selling prices. We maintained our industry-leading expense leverage metrics as warehousing, delivery, selling, general and administrative expenses as a percentage of sales was 13.1% during the quarter on a same-store basis, which compares favorably to 14.1% in the third quarter of 2017 and was consistent with the second quarter of 2018.

Turning to the year-to-date results. Revenues for the first 9 months of 2018 were $3.2 billion, up 27.2% from the first 9 months of 2017 as average selling prices increased 15.1% and tons shipped increased 10.5%. On a same-store basis, revenues were $3.1 billion in the first 9 months of 2018, with volumes up 4.4% and price is up 15.2%. Gross margins decreased by 30 basis points in the first 9 months of 2018 compared to the prior year period as the average cost of materials sold was up $214 per ton. However, gross margins, excluding LIFO and purchase accounting adjustments, rose 220 basis points to 20.1% in the first 9 months of 2018 as average costs rose by $165 per ton as compared to average selling prices, which grew by $252 per ton. Net income attributable to Ryerson Holding Corporation was $105.4 million or $2.80 per diluted share in the first 9 months of 2018 compared to $17.1 million or $0.46 per diluted share for the same period of 2017. Net income attributable to Ryerson Holding Corporation, excluding the gain on bargain purchase, restructuring and other charges and impairment charges on assets was $34.2 million for the year-to-date period of 2018 or $0.91 per diluted share compared to $17.2 million or $0.46 per share in the year-ago period, nearly double our earnings year-over-year. Adjusted EBITDA, excluding LIFO, increased almost 80% to $257.5 million in the first 9 months of 2018 compared to $143.5 million in the first 9 months of 2017. Ryerson's equity increased to $102.1 million at September 30, 2018, from an equity deficit of $7.4 million as of December 31, 2017, as we continue to solidify our balance sheet through income generation, marked investments in growth and continued operating model improvements. Ryerson's third quarter inventory days of supply was 80 days, or 74 days on a same-store basis compared to 74 days in the third quarter of 2017. As we continue to execute the post-close optimization plan at Central Steel & Wire Company, we anticipate our days of supply to return to our 70- to 75-day target range, generating significant free cash flow of $30 million to $40 million through the process. We maintained ample liquidity during the period. As of September 30, 2018, borrowings were $589 million on our primary revolving credit facility, with additional availability of $396 million. Including cash, marketable securities and availability from foreign sources, Ryerson's total liquidity was $446 million as of September 30, 2018, compared to $414 million as of June 30, 2018, as the working capital assets acquired in the Central Steel & Wire Company acquisition increased our borrowing base, which offset the cash used in purchasing the company. Ryerson used $62.4 million of cash for operating activities in the first 9 months of 2018, driven by higher-valued inventory and receivables compared to year-end. In the first 9 months of 2017, cash used in operating activities was $93.3 million. Capital expenditures were $29.7 million in the first 9 months of 2018 compared to $15.8 million in the prior year period. We expect to make approximately $40 million of capital expenditures in 2018 as we continue to invest in additional processing and material handling equipment. Now I'll turn the call back over to Eddie to conclude.

Thanks, Erich. Ryerson excelled during the first 9 months of 2018 and our financial position continues to strengthen demonstrably. We're improving the company in every respect through our strategic growth initiatives, intrinsic improvements in realized gross margins, coupled with better operating expense, working capital management and legacy liability management, which have led to a book equity value of $102 million as compared to an equity deficit of $110 million at the time of our IPO in August of 2014. Ryerson's best days are ahead of us as we work passionately to improve the customer experience with unparalleled speed and consistency of scale. The building of an intelligent network of connected service centers that maps to an expanding array of industrial metals, value-added processing and logistical resources continues to shape a rewarding future for all Ryerson stakeholders. With that, let's open the call to your questions. Operator?

(Operator Instructions) Your first question comes from Martin Englert with Jefferies.

So looking ahead into early 2019, can you provide a little bit of color as to what your customers are seeing and anticipating regarding some of the demand trends of -- among the various end markets that you serve?

Yes, Martin. I'm going to kick it over to Mike and Kevin in just a second. But given all the lagging momentum that's in the economy and even some leading indicators that are still strong relative to their baselines as to whether the economy is expanding or contracting, the feedback and the information we're getting is still positive. I think in the second half of '19, there's still some key variables that are going to need to reveal themselves as to how robust 2019 turns out to be or if it backslides at all. But the feedback we have, at this time and going into 2019, is that demand trends are still good, and pricing, although it's trended down somewhat, is still fairly well supported. Mike, Kevin?

Thanks, Eddie. Martin, this is Mike Burbach. Listen, I don't have a lot to add that Eddie didn't touch on, but I would tell you this. Listening to our customers, both from what they are telling us and what we're seeing from the forecast to us for first part of next year, the sentiments and the activity looks to be pretty strong. And it's across a number of sectors. It looks like the commercial ground transportation area will remain strong into 2019. We're seeing good things about heavy equipment manufacturers, so by and large, the outlook remains pretty strong and that's the message we continue to hear from our customers.

Okay. On the heavy equipment side, anything specific as far as the type of equipment the end markets that would be serving?

They've published different things both from agriculture, construction, mining-related that the backlogs are good and looking strong into next year. So those all appear to be common themes that we're hearing from a number of producers.

Okay. Got it. That's helpful.

Hey, Martin, it's Kevin Richardson. The only thing I would add, and we've touched on it on -- that we touched on it on the opening commentary, but the 1 end market that has been particularly strong has been the transportation, particularly the Class A truck market and after a strong 2017, it looks like 2018 build rates going to finish up 20% plus and the forecast going into 2019 is for increased build rates even over the 2018 rates. So that market, in particular which has long visibility in terms of the lead times, looks encouraging.

And taking a look at -- into the fourth quarter here. You did highlight a muted seasonal decline that's anticipated, I guess, average prices probably down somewhat too, but any detail or goalpost that you can provide regarding the ASPs in the 4Q? And also, I would anticipate probably a LIFO income in fourth quarter?

Yes, Martin. Erich will take the LIFO question here in just a second. I think that if you look at commodity prices, one of the surprises has been if you look at the indexes, both the Bloomberg sub index for industrial metals, and also just the LME indicators, commodity prices are down. And I think as we move through Q4, there's been a tailing off of commodity prices that will show up in the spot average selling prices as we move through the quarter. Contract prices will be better supported based on the average nature of those formulas that govern those contracts, so there'll be a slight decline in ASP and it will roll with some of the other components, such as nickel and chrome and so on and so forth. But compared to last year, it'll be up, and conditions in the fourth quarter as compared to last year will still be favorable when we look at it year-over-year, but a little bit down sequentially. Mike and Kevin, you want to add to that?

No. I think that would be the way we see it -- I see it as well, Eddie. So not much more to add.

Yes. And just responding to your question on LIFO, we had $32.1 million of LIFO expense in Q3. We do see that flipping and turning into LIFO income in Q4. Right now, our preliminary estimate is somewhere around $10 million of LIFO income in the fourth quarter this year.

Got it. Very helpful. And if I could one last one on the capital release from Central Steel & Wire you called out there on the call. What's the time horizon that you would anticipate for that?

Yes. I think Jim Claussen is with us. He is the President of Central Steel & Wire. He's with us, I'll kick it over to him for some additional commentary. But the way we look at CS&W is, I mean, job 1 is to retain and grow revenue to the greatest extent possible. So you leave a certain amount of optionality open in terms of how you go about that process in rationalizing working capital in the smartest possible way. That said, over that 3-year period that we referenced in the script, we would expect to take out working capital -- moving working capital down towards the Ryerson range of 70 to 80 days over that 3-year time frame, reflective of the mix of Central Steel & Wire, which is more heavily weighted towards long and tube. So for long and tube, relative to sheet, maybe you add about 5 days -- 5 to 10 days as you start to bring that down, but working capital release somewhere the neighborhood of $30 million to $40 million over that 3-year period. Jim?

Yes. Thanks, Eddie. Yes, Martin, I would -- Eddie really covered the answer there, but we're looking at continuing to work through supply chain efficiencies and optimize the working capital and that will drive cash as we achieve the goalpost sort of around Ryerson's best-in-class working capital management. As mentioned, that's about $30 million to $40 million, and we're working diligently to accomplish that in the coming quarters.

Your next question comes from Matthew Fields with Bank of America Merrill Lynch.

Given that you've funded the Central acquisition and working capital draw with revolver borrowings in 3Q, your absolute level of debt is kind of the highest, it's been in a while in several years. What's the outlook in 2019 as steel prices maybe roll over a bit? I don't know, you'd be the expert on that, but what's the outlook on 2019 as, perhaps, some working capital is released, free cash flow is generated and you're able to pay down this debt level?

Yes, Matt, that's a pitch I can hit. Any way you cut it, we're working on a monster year, so we're having our best year since 2006. And so I would come back and say, if you look at our net-debt-to-EBITDA and I know the LIFO vigilantes had been sort of been holding court for most of the year. But we've always looked at FIFO EBITDA, adjusted ex LIFO EBITDA and we're cognizant of LIFO but it's only going to go 1 or 2 ways. If we bank what we've done this year and we look at that against where we're going to wind up on a net-debt-to-EBITDA basis, adjusted ex-LIFO EBITDA. Those metrics looks pretty good. So if we go countercyclical, and we have a big cash release and we still think 2019 is going to be on balance pretty good year, with that -- with that cash release, that net-debt-to-EBITDA is going to take a step down as to where -- from where it's been historically. So I kind of like where we're going and where we're sitting going into 2019. And anything that comes our way, we've seen it before and we performed really well. I mean, if we go back to 2015 and we say well, it's going to be a 2014 and then 2015, 2016 environment. I sure hope not, but if it is, we've been there before and we've done a really good job. I don't think it's going anywhere near there. So if it's just a little bit down, if average selling prices are little bit down, demand is incrementally up and then we see what the second half of 2019 brings. First half should still be pretty good in my eyes. And we still take a step down in net-debt-to-EBITDA relative to where our metrics have been. And then if you look at the revenue addition from Central and you look at the EBITDA earnings power that we're already starting to generate from Central, we've got a higher baseline revenue, we got a higher baseline EBITDA. So I'm not sure all those things have really been fully accounted for when looking at Ryerson through that analytical prism as to where we're going versus maybe where we've been.

And just a supplement to that a little bit, even though our absolute debt level is higher, if you do take a look at our net debt over EBITDA, we're at 4.1 turns now at the end of the third quarter, and that's with the Central Steel & Wire acquisition, and that's the same number, 4.1, that we had at the end of June. And you back up from there, we're at 5 turns at the end of the first quarter, 5.3 at the end of last year and 5x at the end of 2016. So from the perspective of what are we doing with our overall debt -- net debt leverage, we are bringing that number down and keeping it consistent.

Unless we see some really attractive growth opportunities. And again, Central is a really attractive opportunity for Ryerson, unless we see -- and Fanello was and Guy Metals was and Laserflex was. But unless we see a really attractive growth opportunity, we're really set up to make some real -- I mean, make some real strides in paying down the debt and getting our leverage ratios down. And I would say, if you look at the trends in our business and you look at where legacy liabilities are going and you look at where debt is likely to go, good setup for us.

So appreciate all that commentary. Any kind of quantifiable benchmarks or capital allocation themes to -- for us to think about on sort of how you aim to tackle this in 2019? Or...

Yes. I mean, we said 2/3, 1/3. Like I said, I mean, I think Central was a rare opportunity for us. So really it wound up being a liquidity-neutral deal. We booked a bargain purchase gain on the transaction of $73 million, nobody saw that coming. So I think, in terms of quantitative -- quantitatives, we're pretty much stuck with 2/3, 1/3 formula, I think, in 2019 unless we see something really attractive. We can probably improve on that in terms of how we apply that free cash flow to debt reduction.

And this is Erich. And we've also targeted a 3 turn target for us, so we've moved from 5 down to 4.1 and we're moving towards 3.

Your next question comes from Phil Gibbs with KeyBanc Capital Markets.

Question on just the operating expenses and trying to parse through some of the callouts here and get to the real base. I know you had restructuring which you pulled out, but how many -- or how much transitory cost in your SG&A was there in the quarter from deal cost and things of that nature that we may be able to pull out?

What did we book, 6.7, was that the number on transaction cost?

Well, our restructuring charges, as we put on the face of the balance sheet $2.7 million.

6.7.

Those are the true onetime expenses that we've had. As far as the rest of the expenses that are running through for Central Steel & Wire, we did have some purchase accounting adjustments at kip to quarter. Those were backed out from our adjusted EBITDA, so on an adjusted EBITDA basis, you are seeing consistent numbers of what we would expect going forward.

So I think the really pleasant surprise for us frankly, was given the headline news around cost pressures. I think we manage those pressures exceptionally well. I mean, our same-store expenses were up by $1 million or less than 1% quarter-over-quarter, so given the environment, that was just an outstanding job by all my Ryerson teammates. So our expense leverage that we got, even after making a significant acquisition, I think, is a -- was a really good story.

Okay. And then Erich, might I think that $6 million to $7 million, your number that you all had broken out in the adjusted EBITDA, so that includes both the purchase price accounting and the restructuring? Is that the way to think about it? Or is there other transaction costs in there that are in OpEx, or is Opex a clean number?

Yes. The restructuring charges are running through the organization, that's the $3 million number on the adjusted EBITDA schedule. And then the purchase consideration and other transaction costs of $6.7 million. That $6.7 million includes the $4.7 million of purchase accounting that hit our cost of goods sold number and the rest of that was in expenses.

The rest of that would have been maybe in OpEx? Okay.

Yes.

Okay. Okay, that's helpful. And any -- any help on FIFO gross margins excluding the purchase price accounting in Q4? I think they were -- what, 19 -- a little north of 19.5% in Q3?

Yes. 19.6%.

So I'm just trying to gauge what we should anticipate given that obviously, you have some catch-up on costs coming into the quarter.

Yes. I mean, well, as Erich said, I mean LIFO certainly peak in Q2, started coming down in Q3, it will be a credit in Q4, Phil. So there'll be some margin compression. Don't think it's going to be outsize by any means, but there'll be some margin compression. Just in terms of the reset that we're going through that, that mini reset that we're going through now with the fall in nickel pricing and really may be a flattening to even slight decline in carbon pricing, as it starts to maybe move up a little bit with mill price increase announcements as we get through the Q4, so a little bit of compression, but I don't think it'll be outsized.

And Eddie, I may have missed the point. The inventory trying to get Central -- targeting Central to get in line with your own inventory turnover. What's the effect of time line that you think you can do that? Is this something you're trying to achieve in the next 12 months? Or is it something that we should think about as like a 1 to 3-year goal?

Well, it's 1 to 3 years, that's a glide path. I mean, if we see a path to doing it sooner, we will. But again, I think whenever you're looking at revenue retention as your primary objective, it's very important to be careful as to how you map that revenue and how you map that supply chain and where those products come from and what service centers that they're being delivered out of to the end customers. So you have to be very careful when you go through that, because I mean, the goal -- the first goal is not to just hit a working capital number for the sake of hitting the working capital number. We'll get there because that's how we run our business. But I think the real sensitive part of that is whether you do it in year 1, year 2, year 3 as you're really trying to solidify the customer experience that goes with the Central Steel & Wire brand as part of Ryerson. So I have no doubt that we'll bring Central very close, if not to Ryerson's operating metrics, but I think revenue retention is really the governing principle as we go through that.

(Operator Instructions) Your next question comes from Chris Terry with Deutsche Bank.

A few questions for me. Just on the CSTW acquisition, a $50 million longer-term target. Can you put that into context their actual cash flow? So what you expect post-CapEx interest in taxes?

Cash flow? You want us to do a model with you on the call?

No, I was just assuring the sort of what that $50 million would convert into on a free cash flow basis? Or how you think about, particularly the CapEx?

On a free cash flow basis, I mean, the CapEx requirement at Central is modest. It was a very asset-rich acquisition. If you look at the equipment that they have and the equipment that we have, there's some -- there are some nice points of intersection and overlaps, and we look at, say, a $50 million of EBITDA target over 3 years and a reasonable maintenance CapEx number with a little bit of growth in that, kind of feels like something on order of $50.5 million, $50.10 million, so call it $7.5 million on a free cash flow basis at that steady-state mid-cycle EBITDA run rate, just $42.5 million.

And just in terms of -- and this has been a comment on -- from a number of the steel companies who are just interested in your take on it. The ordering activity in October has picked up post -- somewhat of a hiatus as has been mentioned in September. What's your read on that? Or do you have any comments on that? Just trying to square with what other companies have said.

Yes, Chris. And there's 2 parts to it. I think, one is the seasonal slowdown where there's been a lot of, call it, chaos to the first half of the year in terms of supply chains and where material is coming from and how people are going to import or not import and how they were going to get on domestic books, if they haven't been on domestic books. I do think that from Q3, from September even into October, things have slowed down a little bit. And they slowed down I think because people were over-inventoried, and they're bringing inventories down to a more appropriate level in Q4 with the holidays coming up. If that's all it is, it'll be short-lived, and then people will start replenishing as we get into January and February and gearing up for Q1 and Q2 of next year, but turns out to be a little bit more than that and prices come down a little bit further than -- that might protract it by a month. But I think it's -- the way it looks to us right now is it's very seasonal, and it's not that much different than what we saw last year, the year before. It's only different in terms of magnitude in the base level of where prices are today. So again, we look at average selling prices, and we look at overall demand trends through this Q4 and going into to Q1 of 2019. Certainly, think outside of some kind of black swan event, the setup is pretty good from again, from what we can see right now the setup looks pretty good and certainly we can't envision another 2014 to say 2015 transition. So momentary pause, maybe in buying levels, but nothing out of the ordinary. And I would ask Mike and Kevin to comment on that as well.

Hey Chris, this is Mike Burbach. Yes, I think what Eddie described is what we're seeing in the areas I look after. There's more seasonality than anything else that we're looking at right now and as we touched on earlier, the sentiments are pretty darn good right now. There are some corrections in price with stainless surcharges dropping and hot rolled coil moderate in a little bit, but put it all together, I think Q4 looks pretty seasonal. In fact, I think we mentioned earlier on that we're thinking that our Q4 will finish probably a little bit better than what is typical for what the industry says from a volume perspective, but not much more to add than that.

Chris, Kevin Richardson. The only thing that I would add is that if you look through the entire supply chain, you can see mill utilization rates for the mills getting above 80% and it's been a long time since it's been above to 80%. And that is a continuing shift as less import has come in and the mills have gotten busier. So, which is the -- obviously, the intention of what the tariffs and the quotas were geared to do.

Yes. I mean, if really a cap utilization stays about at 80%, if that becomes an enduring trend to the fourth quarter, that's actually bullish, so that could bring -- that could actually bring replenishments back sooner.

Your next question comes from Phil Gibbs with KeyBanc Capital Markets.

Now the question was just on the labor market situation. I think we're hearing from basically every single company in a metal supply chain that labor is coming tight, there is a big competition in the market, a lot of wage pressure, and I think a lot of it seems to have emerged in the last, feels like, last 3 to 6 months. Any comments that you can make on that in terms of what you all are seeing? I think freight was obviously, the canary but it seems like it's migrating into more aggressive labor pressures as well.

Yes. I mean, the jobs number this morning was very strong, and certainly, that number would support what we're seeing anecdotally where the labor market is healthier than it's been at any time since 2009. So some open positions are taking longer to fill. There's a some skills that are in high demand that really take longer to place in the organization. And so those things are real enough. We just got to take it quarter-by-quarter. I mean, I think we've got really good programs in place to mitigate and even turned that into a longer-term positive for the company, but we're certainly experiencing what most firms are experiencing in terms of a greater tightness in the labor market. Mike and Kevin?

Phil, it's Kevin Richardson. I'd say from my perspective, it's the tightest labor market I've ever managed through, so it is everything that you hear. We see it in some geographies tighter than the others, but I think one of our advantages is where we are -- where we're capacity sure, we're able to flex in new business ground to other centers, and then we're really focused on cross-training to make sure that we have as much flexibility within the workforce. But labor markets are tight, which is a good sign of what this is -- what this means for industrial America.

And when, Eddie, did you think you saw that inflection? Or is it just been something that's been like pulled like the rubber band in the last 12 months?

So I really think it was Q2 and Q3. I mean, and it's continuing to some extent. I mean, if you look at the year-over-year metrics, the wage growth, I think, within our industry is more or less parallel. I mean, what's being reported out there anywhere from 2.5% to 3.5%. We're going to have to wait and see if that kicks up. I mean, there is some projections that are indicating that wages might get up to 4%. But I think when those things happen, you really -- you double down on lean initiatives, you double down on productivity enhancing initiatives. We are fortunate that in our network, we can really maximize resources within our network because we really -- we have so many interconnected service centers that can really work in a coordinated fashion to handle orders as they come in. And as we can roll them over to many places where we have a little bit better setup in terms of capacity and labor. So I think the team has done a wonderful job of managing. I just -- I thank all of our operators for all their hard work and what they've done this year to date and I mean we'll just -- we'll just stay on our toes and will manage through it well.

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

Thank you for your continued support of an interest in Ryerson. We look forward to talking with you again next quarter. Happy Friday.

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