Good day, and welcome to the Ryerson Holding Corporation's First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Justine Carlson. Please go ahead, ma'am.
Good morning. Thank you for joining Ryerson Holding Corporation's Q1 2021 I'm here this morning with Eddie Lehner, Ryerson's President and Chief Executive Officer Mike Burbach, our Chief Operating Officer Jim Clausen, our Executive Vice President and Chief Financial Officer and Molly Cannon, our Controller and Chief Accounting Officer. Jon Orth, our Executive Vice President of Operations, will be joining us for Q and A. Before we get started, let me remind you that certain comments we make on this call and contains forward looking statements within the meaning of the federal securities laws. These forward looking statements involve a number of risks and uncertainties, Including the impacts of COVID-nineteen and related economic conditions 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 ks for the year ended December 31, 2020. You are cautioned not to place undue reliance on these forward looking statements, which speak only as of the day 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 Q1 2021 earnings release filed on Form 8 ks yesterday, which is available on the Investor Relations section of our website. I'll now turn the call over to Eddie.
Thank you, Justine, And thank you all for joining us this morning to discuss our Q1 2021 results. I hope this call finds you all safe and well. I want to begin by thanking my Ryerson colleagues for making the most of our opportunities And overcoming the many challenges engendered by the pandemic now in its 2nd year as we together achieved truly outstanding To our suppliers as we work through the supply side challenges Posed by this very unique time in our shared history. At this point, the pandemic is still very much with us. However, Vaccination efficacy data looks to be promising indicating that better days are ahead.
Whether we debate commodity and demand regular cycles or super cycles, supply chain squeezes and their duration, Fiscal and monetary policy support effects, decarbonization, supply chain reorientation And rotations and ongoing secular growth stories. What is clear is that the current environment of higher prices and recovering demand Looks to be stronger for longer. This is evidenced clearly in channel inventories That are still well below restocking parity before even mentioning inventory levels necessary to support growth. The PMI report from this week illuminated what we're experiencing in that demand is recovering and getting stronger, But for acknowledge shortages of various manufacturing inputs, whether it is labor, Transportation, lumber, metal, semiconductors, foams, sealants and you name it. Even end markets, which have been trailing the recovery, such as heavy truck and trailer and machinery and equipment, Have strengthening backlogs amidst the aforementioned supply side constraints.
We see continuing strength in commodity price drivers supporting stainless steel, aluminum And carbon steel average selling prices and margins through the 2nd quarter given a trifecta of pandemic, Trade policy and decarbonization impacts. This spells a favorable setup for the 2nd quarter and argues well for tailwinds supporting improving program pricing and gradual improvement in supply chain bottlenecks for the balance of the year. 20 21's base case is shaping up as an opportunity for Ryerson to accelerate The deleveraging of the balance sheet to further derisk legacy liabilities and to advance our operating model As we continue executing on our customer centric operating model, driven by our overarching mission Consistently delivering great customer experiences at speed, scale and value add throughout our intelligently connected network of service centers. I'll now turn the call over to Mike to discuss the Q1 pricing
Thank you, Eddie, and good morning, everyone. Returning to the commodity environment, The aggressive price increases in carbon products that began in the second half of last year have continued to unprecedented levels As lead times remain extended, there appears to be little give in futures pricing until possibly later in the year or early next, Depending on when new capacity becomes available and input constraints abate. Likewise, Alame aluminum End of the Q1 8.6 percent above the year end price and continues to appreciate into the 2nd quarter. LME nickel prices had, on the other hand, softened slightly by the end of the first quarter Compared to year end, but have recently turned higher again given global stainless steel demand and emergent EV battery needs despite recent nickel mat processing and refinement capacity announcements in Indonesia. At this time, we anticipate that prices across all three of our primary commodities will remain Elevated throughout the second and third quarters as supply chains recover and we expect that price normalization Expanding on the demand environment, Macroeconomic indicators continue to report recovery in the Q1.
North American industry shipments As measured by the Metal Service Center Institute or MSCI reported 1st quarter volumes only 1.2% below Year ago pre COVID levels, while U. S. Industrial production reported year over year growth in March after 18 months of contraction. Ryerson's North American customer activity also continued to improve on balance in the Q1. Compared to the Q4 of 2020, we noted shipment improvement across all of our end markets, except oil and gas, on a sequential per day basis.
Commercial Ground Transportation, Metal Fabrication and Machine Shop And in Industrial Equipment sectors showed the strongest improvement quarter over quarter, supported by renewed strength also showed strong sequential improvement on a per day basis benefiting from healthy construction activity. With that, I will turn the call over to Jim for our Q2 outlook.
Thank you, Mike, and good morning, everyone. Building on the market dynamics that Mike discussed, although pandemic driven uncertainties persist, Ryerson is optimistic About the 2nd quarter business environment. At this point in the quarter, demand momentum continues to build and coupled with supply tightness Elevated pricing across all three of Ryerson's primary commodities. Therefore, Ryerson anticipates 2nd quarter 2021 revenues of $1,320,000,000 to $1,340,000,000 assuming sequential average selling price Growth of 12% to 14% and shipment growth of 1% to 3%. LIFO expense in the second quarter It is expected to be in the range of $74,000,000 to $78,000,000 as replacement costs Continue to increase relative to average inventory costs.
Given these expectations, Adjusted EBITDA excluding LIFO is expected to be in the range of $131,000,000 to $135,000,000 And earnings per diluted share are expected to be in the range of $0.49 to $0.60 Turning to Ryerson's asset management in the Q1. Inventory days of supply decreased to 61 days, below our normal market environment target range of 70 to 75 days, but reflective of the improving demand conditions And simultaneous industry wide supply tightness. Lower inventory levels along with Further improvements in our receivables and payable cycles drove our cash conversion cycle to 53 days, The lowest achieved since 2007. In the Q1, working capital investments And pension contributions drove a use of operating cash of $47,300,000 During the quarter, Ryerson was able to grow sales by an 8:one net working capital ratio Through leveraging our interconnected network, supply chain analytics and mapped inventory database, 1st quarter capital expenditure investment totaled $6,500,000 At this time, we affirm our previously announced maintenance and growth CapEx budget base case of $40,000,000 in 2021. Turning to expense management, While warehousing, delivery, selling, general and administrative expenses increased by 10.3% Compared to the year ago period, Ryerson realized expense leverage in the Q1 as expenses as a percentage of sales Decreased by 40 basis points in comparison to the Q1 of 2020.
There are inflationary effects Noted in areas such as lumber, delivery, packaging materials that are working their way into costs, Variable incentive compensation expenses also increased by $20,600,000 compared to the year ago period Due to the significant increases in revenue, gross margin dollars and adjusted EBITDA excluding LIFO Realized during the Q1 of 2021. However, this increase was partially offset I reduced salaries and wages expense as pandemic induced workforce adjustments during 2020 resulted in lower headcount. Our progress continued with respect to the turnaround at Central Steel and Wire. Since we acquired the company on July 1, 2018, we have optimized working capital, reduced expenses, sold non core assets, Completed an ERP conversion to SAP and introduced new systems to the business and are pleased to report The Central Steel and Wire generated $108,000,000 in revenue and $10,400,000 in adjusted EBITDA excluding LIFO In the quarter, we see good things ahead for the Central Steel and Wire business and franchise as we move further up the transformational curve. Now I'll turn the call over to Mollie to provide further detail on our Q1 financial results.
Thank you, Jim, and good morning. In the Q1 of 2021, Ryerson achieved revenues of $1,150,000,000 which exceeds the range communicated in our Q1 guidance, with average selling prices up 21.9% And volume up 10.4 percent from Q4 2020. 1st quarter revenue represents an increase of 13 point 6% compared to the Q1 of 2020 with average selling prices up 18.4% And tons shipped down 4.1%. Gross margin contracted to 17.2% due to higher cost of goods sold recognition compared to 19.4% for the Q1 of 2020. Reflective of the period's rapid and steep industrial metal price increases, most notably in carbon steel, Included in Q1 2021 gross margin is LIFO expense of $83,800,000 which significantly exceeded our guidance expectations due to inventory average costs rising more than estimated.
Excluding the impact of LIFO, 1st quarter gross margin expanded by 7 20 basis points from the Q1 of 2020 and sequentially from the Q4 of 2020 by 5.30 basis points to 24.6%. Net income attributable to Ryerson Holding Corporation for the Q1 was $25,300,000 or $0.66 per diluted share compared to net income of $16,400,000 or $0.43 per diluted share for the year ago period. Included in Q1 2021 net income There's a gain on the sale of assets of $20,300,000 related to the sale of our Renton, Washington facility. The sale of the facility is consistent with Ryerson's plans and past actions to optimize its asset portfolio Last year's bond refinancing contains special redemption features to pay down the bonds on an accelerated timetable on favorable terms, And we believe we have an opportunity to reduce our long term debt balance by up to $150,000,000 by year end, Thus, potentially reducing cash interest expense by another 12,750,000 Attributable to Ryerson Holding Corporation, excluding the gain on sale of assets and the associated income taxes, If we were to also exclude the impact of actual LIFO in excess of our estimated LIFO expense for our Q1 2020 earnings release And the associate income taxes, adjusted net income attributable to Ryerson Holding Corporation Would have been $34,600,000 or $0.90 per diluted share.
Ryerson achieved adjusted EBITDA excluding LIFO of $123,500,000 in the Q1 of 2021, which represents a year over year increase of 2 59%. The company's 1st quarter total debt remained relatively Consistent with net debt rising slightly since the 4th quarter by $19,500,000 to $698,100,000 As revenue increases and pension contributions required less net working capital than in prior recovery cycles, The significant debt reductions made in 2020 coupled with our increasingly trailing 12 month adjusted EBITDA LIFO produced a leverage ratio of 3.3 times for the quarter, down from 5.7 times at the end of the year and just outside of our long term strategic target range. At the same time, Ryerson's liquidity increased significantly and ended the quarter with $583,000,000 of global liquidity as the company's adjusted EBITDA In all, Ryerson's Q1 results highlight the important balance sheet improvements we have made to date and display our enhanced operating profile. With that, I'll turn the call back over to Eddie to conclude.
Thank you, Molly. During the NFL draft last weekend, the following was said about my beloved Cleveland Browns and I quote, This really is about the process, because over time process wins, plans win. There will be misses along the way, maybe big ones. But if you believe in smart ideas and stick to them, Good things start to happen long term. It can almost look and feel easy, like you knew moves would happen before they happen.
It's clear 2 years in that Andrew Berry's big plan for putting together the Browns roster is to always have a plan. Now I'll say it's never been or felt easy, but it's a joy nonetheless To see our progress amidst the many great and small turbulences experienced since I joined Ryerson in the summer of 2012. I thought this comment about the Browns transformation was particularly relevant to Ryerson And our journey as we have a plan, we have a process and we've executed that plan within our process in an under the radar, But always advancing way despite existential industry crises in 2009, 2015 In 2020, 2021, I thought it useful to do a freeze frame to look back Not just year over year sequentially, but over the past 24 months to Q1 of 2019 and would note the following. Ryerson delivered just under 2 times the amount of adjusted EBITDA excluding LIFO at $123,500,000 Then we did during the Q1 of 2019. And we did that with 85% of the full time equivalent headcount At a cash conversion cycle lower by 24 days, at net debt lower by 436,000,000 And deferred employee liabilities lower by $40,000,000 We could say over 179 years In the past 13 years in particular, we are not exactly an overnight sensation.
Like feel good stories and make good stories about companies that truly transform themselves without a lot of fanfare and notoriety, then Ryerson Might be the story you're looking for. We expect the best for ourselves by giving our stakeholders the best of ourselves. If we take a look back to our IPO in 2014, Ryerson had an enterprise value of approximately $1,750,000,000 with fixed cash commitments of $181,000,000 net debt of $1,100,000,000 And legacy liabilities of $396,000,000 Today, we have an enterprise value of approximately 1,475,000,000 Our fixed cash commitments today are squarely under $100,000,000 and falling. Our net debt is a little more than half what it was at the time of our IPO And falling and our legacy liabilities are nearly half of what they were and falling. Looking at our current financial position, I believe it might be time to have a more substantive discussion as to where enterprise value is and goes As math is ultimately math and when debt declines and legacy liabilities decline structurally, While the operating model continues to improve, price value go.
We look forward to making our case for the shareholder community in the months years to come. Whether this recovery cycle lasts for 1 year, 2 years or 3 years, the emergent base case for Ryerson is a company with a plan, Process, execution and performance that is poised to accelerate debt reduction, further derisk legacy liabilities, Drive operating leverage and deliver increasing value accretion to shareholders. The infrastructure needs of society are self evident. And with that plurality, Industrial Metals are once again making their case as the once in future Essential and recyclable material kings of how societies want and need to live and prosper now and in the future. To tying it all together, let's say it one more time in Harmony, it's time to build and we're grateful that Ryerson through its 100 79th year in business is in the thick of the action with a plan, a process with passion and purpose ready to write the best chapters yet and our organization's fantastic journey.
With that, we look forward to your questions. Operator?
And we will now take a question from Matthew Fields with Bank of America.
Hey, Eddie. Hey, everyone. Good morning. A couple sort of general steel questions first and then maybe some more details on the balance sheet. But Obviously, the demand for steel is very high in the U.
S, but it seems like mills are holding back production On one hand, by not sort of opening up blast furnaces, but it seems like with auto slowdowns and chip shortages, they can divert tons to the spot market, Imports coming up, but not quite alleviating the demand. Why isn't The service center community able to respond and get the tons that are needed to sort of balance out supply and demand.
Hey, Matt. Hope you're doing well. Boy, that's a mouthful, right? Look, I think if we go back to last August and we look at a CRU number of $4.34 and we look at where the price is today, You're not going to find anybody that I know that really predicted that. And I think whether it's it's certainly Mostly pandemic related, but you see all these dislocations, whether it's been semiconductors, labor, Workforce dislocations, lack of containers, logistical bottlenecks, various inputs that just don't seem to be in the right place at the right time.
There's just lot of things that are being remediated right now as a result of economic reopenings that are really asynchronous. And I don't think anything is that intentional right now. I think that Everything that's been reported is more or less accurate. And I think this is a response, even though it feels like a clumsy response Throughout the value chain, this is a response to those dislocations that are really quite extreme and stacking On top of one another, so when we look at service centers and what we can get, lead times are extended domestically. They've almost tripled since August, September of last year, international lead times are longer and are less predictable.
You overall have a supported dollar. You've got Low import availability and international prices are rising. As economies reopen and as demand for Goods maybe more so than services, demand for goods is clearly outpacing supply. And we mentioned this in our comments that We're still a long ways away from what I'll call inventory parity where you're really not long or short and your inventory is Able to support maybe a midpoint of cyclical demand. So demand indicators are pointing us above Average demand when we look back over the last 10 years or the pre pandemic levels.
So right now there's The positive catalysts far outweigh the negative catalysts right now looking out over the next several quarters. And we would expect for supply chains to repair and for them to incrementally get better, I don't think people are holding back capacity, intentionally. I think everyone's trying to work through bottlenecks that Really start with labor, frankly, and then move on to other inputs in terms of getting your entire workforce back, And then being able to apply those resources to backlogs and schedules in a more balanced way.
I mean, from the import point of view, it seems like China is ramping up production. Iron ore has just hit another record. So they're not holding back anything. Is the problem getting steel from other parts of the world to the U. S.
Not Availability of steel in other parts of the world?
Matt, there's a lot of different There's a lot of different crosscurrents right now. I mean, you've got to put some weighting on decarbonization efforts. Certainly, China is consuming most of They're pretty much consuming all of what they're making and they're actually a net importer for the first time in probably, I don't know, 13, 14 years. And so when you look around the world and you look at these asynchronous recoveries, but you look at how people are trying to ramp up capacity and where it's going, Clearly, the availability of import that was that really is of not of really recent memory Going back 2 years, 3 years, 4 years, 5 years, 10 years, that availability just hasn't been there. And that availability that is there, It's priced much higher at a longer lead time.
So these things are going to take a while I think to smooth out. And I think eventually, Of course, we'll get to some type of equilibrium or a better balance than what we're seeing today. But it's hard to see that happening over the next 3 to 6 months right now. I mean, it's hard to see based on all the indicators we have and the information we have. So
Everybody says that the cure for high prices is high prices, but it doesn't we seem to be breaking that paradigm right now.
Yes. I mean, there's no shortage of material that's out there's no shortage of information, Matt, that's out there. I mean, people are talking about, okay, eventually high prices will cause demand destruction or Canceled backlogs, but we're just not seeing it right now. This could be a time where secular growth catalysts in infrastructure And reopening and recovery, this could be a time where we do see A more sustained up cycle than what we've seen over the last decade. Okay.
And then on the balance sheet, I think you mentioned an opportunity to reduced debt by $150,000,000 I just kind of wanted to go over how you break down that number. Is that focused on ABL pay down? Is that using your special bond redemption features, whether it's the $50,000,000 at 103 Or an equity claw or what? Just walk me through how you get to 150?
Sure. So There's a special redemption feature we have in the indenture that allows us to redeem $100,000,000 using Real Estate Sale Proceeds and that's it at $103,000,000 and we can do that anytime. There's also A second of 3. We already exercised the first one in October last year, but there's the second of 3 $50,000,000 amortization options where we can use general liquidity to reduce the outstanding principal of our high yield notes. So I mean, it's certainly reasonable to expect as a base case based on how the year is emerging And how the base case is emerging for the year that we would have the ability to prospectively exercise those options, pay down that high yield Pay down that high yield note balance, take out $12,750,000 of cash interest and accelerate deleveraging, take down fixed cash Commitments and really accelerate that virtuous cycle of fixed cash commitments continuing to fall.
And we look at fixed cash commitments, it's Cash interest expense, its pension contributions and its maintenance CapEx. And so we're getting to a point now where as we Mentioned in our comments where there's 2 things that we see when we look at Ryerson and we look at intrinsic value and enterprise value. Clearly, we're getting to a point now where we're liberating ourselves from more of an LBO capital structure. We're liberating ourselves from these fixed cash commitments We're really weighing us down and we should have really much better options going forward in terms of how we look at allocating capital to stakeholders going forward.
Okay, great. And then just on the timing of that, the $50,000,000 at $103,000,000 that you can't use that again until October of 2021?
No, I believe it's 12 months from the actual date of the indenture. So it would be August 1, if I'm if my recall is correct, it'd be August 1. We'd be able to notice the note holders that we intended to redeem The $50,000,000 amortization piece and the real estate piece we can do as soon as we have proceeds from real estate sales. Right.
And on the I'm sorry, on the real estate front, you've sold $29,000,000 of proceeds this quarter, you sold about $70,000,000 to go?
$70,000,000 to go on the tote board, my man. Yes. Dollars 70,000,000 to go on the tote board, my man. Yes.
But as soon as you do it, you can announce the redemption like the next day?
Yes, I'm going to go ring that bell in the Town Square.
Perfect. I'll listen out for that. Thanks a lot Eddie and good luck. I appreciate it as always.
Thanks, Matt. Appreciate it. Take care.
We'll now take a question from Alan Weber with Robotti Advisors.
Good morning. I had a question about When you talk about the warehousing delivery expenses ex depreciation, you don't really measure that versus, tons sold. And I would think over time, shouldn't you be able to get that leveraging of kind of the infrastructure as opposed to just looking at
it versus revenue? Hi, Alan. How are you doing? So we look at it 3 different ways. We're consistent with how we've always reported it, which is As a percentage of revenue, also because where we're really looking for expense leverage is How are our warehousing, selling and delivery expenses and administrative expenses and our selling expenses, how are those really reacting Changes in the cycle and counter cycle, right?
So we're looking for that expense leverage as revenues go up. And then of course, we're looking to variabilize our cost structure As we get into a counter cycle and then revenues decline on a price and on a volumetric basis. But Having said that, we look at it three ways. We look at it and we've been reporting it historically as, OpEx as a percentage of revenue. To justify an incremental cost to serve or an incremental investment in machinery and equipment.
And then we also look at it as you mentioned, you look at it volumetrically as well.
Okay. That was really my that's I mean, but again, all things considered over time, You should be able to get some leveraging of relative to volume.
Yes, absolutely. I mean, We have initiatives that are ongoing in the company to get those efficiencies and get that productivity up. I mean, I'm really pleased to say and Really just have to compliment all my Ryerson teammates. Productivity has been up significantly over the last 6 months, Particularly in the Q1 and that's a difficult equation to balance right now just given all the Different upsets that have been caused by the pandemic. So productivity is on the rise, safety performance has been really, really good.
And we have projects underway To always optimize our footprint, we have a project in the company that's headed by John Worth called Project Copernicus. And we look at How to optimize the Ryerson network consistently in terms of facilities footprint, equipment positioning, And inventory positioning and how we make the most of that network.
Okay, great. Thank you.
Thanks, Alan. Take care.
And it appears there are no further telephone questions. I'd like to turn the conference back over to
we look forward to being with all of you again in August when we review our Q2 results. Take care.
And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.