Good day, everyone. Welcome to the Ryerson Holdings Corporation's 2nd Quarter 2021 Conference Call. Today's conference is being recorded. At this time, I'd 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 2nd quarter 2021 earnings call. 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. John 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 contain 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 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 Q2 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 Q2 2021 results. I would like to begin this morning by thanking all of my Ryerson teammates for executing an extraordinary quarter as we posted our strongest quarterly revenue since 2,008 And record adjusted EBITDA excluding LIFO. Every day across the organization, we demonstrated our say yes and figure it out culture by always finding a way to get the job done safely amidst an environment of rolling turbulence. I also want to thank our customers for every opportunity At a macro level, elevated pricing dynamics are an ongoing consequence of supply being unable to meet demand in the short term, But there are cyclical and secular factors signaling a longer duration recovery for fixed assets and manufactured goods. As we emerge tenuously from the pandemic and its unpredictable twists and turns, we see supporting variables of monetary policy, Fiscal policy, trade policy, demographics, infrastructure investment, decarbonization, domestic supplier consolidation And demand fundamentals as net favorable against ongoing public health risks, labor pool shortages, Supply side dislocations and geopolitical volatility.
We're not declaring an end to cyclicality in our industry, but noting strong secular growth underpinnings that have been suppressed for a long time as well as changing societal needs favoring Relating this base case environment to Ryerson through the first half of the year and looking forward, we have realized favorable operating leverage because of decisions made And actions performed since our IPO in 2014 that are enabling us to build a stronger and better Ryerson under all conditions. The trajectory of the company given present conditions, past performance and confidence in the ongoing execution of our strategic plan Around the customer experience, Ryerson's Board of Directors approved 2 new and vital elements to our capital allocation plan, And $0.08 per share quarterly dividend and a $50,000,000 share repurchase program. This is a confidence marker and a clear indication That the enterprise value shift from debt to equity is underway and that the enterprise multiple is more a relic of the past And a fair evaluation representation of the present and future. I'll now turn the call over to Mike to discuss the Q2 pricing and demand environment.
Thank you, Eddie, and good morning, everyone. Turning to the commodity environment, the price increase And carbon products that began in the second half of twenty twenty have continued to climb as lead times remain extended. Mill capacity has been above 80% for the past several months and futures prices remain elevated through the year. Likewise, Alameda Aluminum ended the 2nd quarter approximately 11% above the 1st quarter's ending price. It has continued to rise into the 3rd quarter on strong global demand against tightening supply conditions, driven by recently announced export fees in China and Russia, for example.
LME nickel prices similarly Appreciated during the quarter, rising approximately 9% in the same periods, supported by strong demand, Constrained supply and longer term secular events around electrification. At this point, we anticipate that prices across the three Our primary commodities will remain elevated through the Q3 and that price normalization will be gradual given supportive demand conditions and longer term trends. Expanding on the demand environment, macroeconomic indicators continue to report The ISM Manufacturing PMI Index read above 60 for each month in the second quarter, well above the growth threshold of 50. While U. S.
Industrial production reported strong year over year growth rates against the pandemic environment experienced last year. While North American industry shipments as measured by the Metals Service Center Institute or MSCI reported relatively flat volumes quarter over quarter. Ryerson's North American volumes in the same periods grew by 2.9% resulting in market share growth. Turning to Ryerson's 2nd quarter customer activity, we noted shipment improvement in our industrial equipment in food and agriculture sectors on a per day basis compared to the Q1 of 2021. We also notice sequential strength despite persisting supply chain challenges.
However, our consumer durable, metal fabrication and machine shop In HVAC sectors reported declines relative to the Q1 of 2021 on a North American per day basis as backlog turnover has been hampered by ongoing supply side disruptions. With that, I'll turn the call over to Jim for our Q3 outlook.
Thank you, Mike, and good morning, everyone. Building on the market dynamics that Mike discussed, While we remain mindful of the challenges posed by our current operating environment, Ryerson is optimistic about the 3rd quarter business environment and anticipates reporting another record quarter. At this point, pricing across all three of Ryerson's primary commodities Continues to be elevated while volumes are expected to soften modestly affected by normal seasonality, pandemic induced volatility and ongoing supply side tensions. Therefore, Ryerson anticipates Q3 2021 revenues of $1,500,000,000 to $1,600,000,000 Assuming sequential average selling price growth of 10% to 12% and shipments flat to down 3%. LIFO expense in the Q3 is expected to be in the range of $88,000,000 to $92,000,000 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 $208,000,000 to $212,000,000 and earnings per diluted share are expected to be in the range of $1.63 to $1.73 Turning to Ryerson's Asset Management in the 2nd quarter, Inventory days of supply increased to 63 days, up from 61 days in the previous quarter. Our inventory levels remain slightly below our through the cycle target range, but are reflective of the industry wide supply tightness, Low channel inventories and effective inventory management practices. Our inventory levels, Coupled with continued management of our receivables and payable cycles resulted in a cash conversion cycle of 55 days. Our free cash flow was strong at $126,300,000 and our average free cash flow yield Was 23% in the 2nd quarter. Capital expenditure investment in the quarter totaled $6,800,000 for $13,300,000 year to date.
Ryerson's continued focus on deleveraging and de risking the balance sheet Has yielded a substantial reduction of our annual fixed cash commitments over the past few years. This effort led to the newly announced capital allocation plan, which provides additional return to shareholders, while still allowing us to continue our deleveraging path and provide ample liquidity to fund our growth initiatives. Celebrating 3 years within the Ryerson family, Central Steel and Wire Company CS and W has made remarkable progress on its transformation since the acquisition. CS and W Has effectively repaid $107,000,000 of its $164,000,000 adjusted purchase price through working capital optimization alone, realized $50,000,000 in 3 year structural cost takeouts, Sold non core assets of $44,000,000 completed an ERP conversion to SAP and introduce proprietary software and systems to the business. In all, over the 3 year period, CS and W's ROI has exceeded expectations and it operates as a much stronger franchise today.
For the Q2, CS and W generated $140,000,000 in revenue and approximately $20,000,000 Adjusted EBITDA excluding LIFO or approximately $250,000,000 and $30,000,000 respectively for the first half of twenty twenty one. With further capital improvements planned, We are optimistic about CS and W's future as the business progresses towards its annual long term mid cycle target of $600,000,000 in revenue $50,000,000 in adjusted EBITDA excluding LIFO. Now I'll turn the call over to Molly to provide further detail on our Q2 financial results.
Thank you, Jim, and good morning. In the Q2 of 2021, Ryerson generated revenues of $1,420,000,000 Which exceeds the range communicated in our 2nd quarter guidance, with average selling prices up 20.1% And volume up 2.9 percent from Q1 2021. Gross margin expanded to 18.1% compared to 17.2% for the Q1 of 2021 as selling price growth outpaced inventory costs. Reflective of the environment's continued rapid and escalating industrial metal price increases, most notably in Carbon Steel. Included in Q2 2021 gross margin is LIFO expense of 105,000,000 which exceeded the previous period's LIFO expense of $84,000,000 Excluding the impact of LIFO, 2nd quarter gross margin expanded by 90 basis points from the Q1 of 2021 to 25.5 percent.
Net income attributable to Ryerson Holding Corporation for the Q2 was 113,000,000 or $2.91 per diluted share compared to net income of $25,000,000 or $0.66 per diluted share for related to sale leaseback transactions completed during the period, reflecting opportunistic monetizations of a portion of Ryerson's owned and appreciated industrial property portfolio. These transactions, which generated net proceeds of approximately $137,000,000 enabled the company Adjusted net income attributable to Ryerson Holding Corporation, excluding the gain on sale of assets and the associated income taxes, Was $48,000,000 for the Q2 of 2021 or $1.24 per diluted share. This compares to Q1 2021 adjusted net income of $10,000,000 or $0.26 per diluted share, which excludes a gain on sale of assets and the associated income taxes. Ryerson generated adjusted EBITDA, excluding LIFO, of $197,000,000 in the Q2 of 2021, an increase of $74,000,000 compared to the previous quarter. To turn results into perspective, our adjusted EBITDA, excluding LIFO, was $321,000,000 in the 1st 6 months of 2021, which not only exceeded the 1st 6 months of 2020 of 55,000,000 But also exceeded full year 20 eighteen's $308,000,000 which was our previous period in which we saw record results since Ryerson was acquired by Platinum in 2007.
Ryerson decreased total debt during the Increasing trailing 12 month adjusted EBITDA excluding LIFO, the company achieved a leverage ratio of 1.5 times for the quarter, down from 3.3 times in the Q1 of 2021 and well within our long term Strategic target range of 1 to 2 times. In addition, we furthered our financial transformation during the quarter by Closing the aforementioned sale leaseback transactions and utilize the proceeds to repurchase $100,000,000 of our outstanding 8.5% senior secured notes due 20.28 at a price of 104% in July. During the quarter, we also announced our second $50,000,000 notes redemption at a price of 103%. These July redemptions decreased the amount of our outstanding senior secured notes to 300,000,000 A decrease of 40% compared to the original $500,000,000 principal. This $200,000,000 reduction in the notes Has reduced our annual interest expense by $17,000,000 At the same time, Ryerson's liquidity again Increased significantly and the company ended the 2nd quarter with $890,000,000 of global liquidity.
This increase was driven by proceeds from the sale leaseback transactions and excellent working capital management as well as the company's rising adjusted EBITDA excluding LIFO. In all, Ryerson's 2nd quarter results highlight both Our improved operating model and the important balance sheet improvements we have made to date. With that, I'll turn the call back over to Eddie to conclude.
Thank you, Molly. As we move through the Q3, We remain resilient amidst the persisting challenges committed to our self help strategies and above all Optimistic about Ryerson's future as we see proof that our advancements are synchronizing and compounding. While Ryerson's durability has remained intact for 179 years, we are not the same company that we were just 7 years ago. Our improved operating model is producing stronger results and our financial transformation is taking shape, enabling us to reduce our leverage multiple and fixed cash commitments. Instead, Ryerson is entering its next phase With higher through the cycle earnings, stronger free cash flow generation and increased investments in digitalization and value add capabilities.
In all, this reconstruction delivers greater value to shareholders, both through a new quarterly dividend and through equity value accretion as we continue to create exceptional customer experiences at speed and scale through our intelligently interconnected network of Service Centers. With that, let's take your questions. Operator?
Thank you, sir. And we'll take our first question from Michael Leshock with KeyBanc Capital Markets.
Hey, good morning. Good morning, Michael.
So my first question, I just wanted to ask in terms of daily demand, what did you In July versus 2Q as a whole. I'm just trying to get a feel for the cadence of momentum that you saw in the quarter.
Yes. I'm going to kick it over to Mike in just a second. I would preface it by saying that demand was slower coming out of extended 4th July holiday and it's very consistent with what we noted in the release and in the Scripted around there being supply side constraints that are kind of throttling or metering backlog realizations. Mike?
Yes. Thanks Eddie and hi Michael. Yes, I think Eddie hit it right. July historically has had some seasonal issues, which was true again this year. But I think besides what we see in the numbers, what we're hearing from our customers is positive.
Sentiments remain strong. We continue to hear about build schedules that are growing in a number of end markets, But we also continue to hear about the challenges that our customers are facing with labor and Different supply chain challenges. So it's a good message. I think the demand is there. I think it's a reality that Sometimes, our customers have more demand than they're able to produce, but, the backlogs are growing.
Got it. And on that, is there any incremental OpEx creep that you're seeing in the 3rd quarter, Given any further inflationary pressures and if there are, what are the primary costs that are driving that, whether it be Labor, freight, raw materials or otherwise?
Yes. We've been pleasantly surprised in that. We know that The cost push pressures are certainly very apparent throughout the economy and in the industrial economy. We've done a really good job of variabilizing our cost structure. So we're seeing costs increase much more on the variable side of the ledger, whether it's variable compensation or it's things that really move up and down with volume.
But certainly, there is some cost inflation through the value chain. And I'm going to go ahead and kick it over to John Orick and John can give you a little bit more color on that.
Thanks Eddie. Hi Michael. There are definitely inflationary pressures that we encountered throughout the year. Looking into Q3 though, however, we feel our work around optimizing our end to end supply chain and looking at best practices From an operating perspective, we are offsetting as many of those as possible. Freight, as you know, continues to be a very around managing our interconnected freight network allow us to offset as many of those as possible.
Got it. That's very helpful. And then I wanted to ask on the mark what markets From an end market perspective are stronger than others and specifically within oil and gas, wanted to get your take what you're seeing there given the oil price Maybe the beginning of some modest improvement in CapEx budgets. What's your outlook there?
Yes. I mean, starting with oil and gas, I think the key word is modest and I think there's a lot of information In the general press supporting the idea that investment is going to be gradual in terms of Offsetting decline curves in hydrocarbon extraction, but we're seeing Really strong demand report outs. It's just getting at that demand. It's getting through those backlogs with the input And we see those backlogs extending and rolling over. And I'm going to kick it over to my brother, Mike Burbach, and he's going to give you some more info on that.
Thanks Eddie. I'm Michael again. So yes Eddie touched on what we're seeing in oil and gas. It's I would say incremental at this stage, our volume in Q2 relatively flat compared to Q1 in that space. We think we'll continue to see incremental gains.
We're seeing inventory levels in the supply chain normalizing a bit, so That could change the dynamics a little bit. But right now, lots of puts and takes that are keeping large swings Happening from one way or the other due to the supply chain challenges. Beyond oil and gas, as we noted in the release, We saw some end markets sequentially showing improved conditions, industrial equipment, food and agriculture, commercial ground transportation, All three of which continue to grow as the year progressed. And the story as Eddie mentioned is positive. The feedback We get on backlogs in future production requirements that our customers are expecting us to help them Come up with the materials is pretty solid.
There were some softness in Q2, but I wouldn't say it was something to Get alarmed about consumer durables and HVAC in particular have been very strong end markets for us through the pandemic in the early part of this year and they had a little slight decline in Q2, but remained very strong And our fabrication and machine shop end markets as well had hit slight softness in Q2.
One of the things
I would know, Michael, is that some of the end markets that were lagging through the pandemic and even through the Early stages of the reopening are really starting to come around. It's more of a backlog turnover Challenge, but some of the more lagging verticals, especially around, machinery and equipment, whether it's an ag or mining or general machinery and We've been supporting the broader industrial economy and really where cyclical and secular investments are going. We're starting to Starting to see real pickup in activity across those end markets, which is a real positive for us.
And then lastly for me, how much have you tapped the import markets given how tight domestic capacity has been and Any color you could give around imports going forward? Thanks.
Yes. I mean, look, I think imports are Sort of a comforting abstraction at this point. I mean, even though the numbers are up, they tend to be more it tends to be more slab oriented. There is some more finished product coming in, but the Lead times are all over the place and they're extended and long. And I think with some of the recent indicators From the pandemic and the variance, getting those orders filled and getting them dependably Across the water is a continuing challenge.
So there's no doubt that I think folks are going to look to import more as a relief valve, but we are not importing more and we really don't see the opportunities as being all that attractive relative to the risk.
Great. Thanks guys for the color.
All right. We'll go next to Joel Tiss with BMO.
Hey, Eddie, that's quite an entourage you built up over there.
It's a hell of a team, Joel. It's a hell of a team.
Yes. You got it. Everyone definitely deserves a lot of credit. This is unbelievable from Since the first day I met you, it's a pretty amazing transformation.
Is there anything We keep getting better and you keep catching bigger fish.
Yes. I don't know about that. Is Is there anything to read into the receivables going up? Anything worrying people not paying? Or is it just that the extraordinary selling off of some of the receivables?
I'm going to have Jim Klossen give you a little bit more color. I would tell you in general, our credit team Our risk management team has done an outstanding job. Our exposure has improved frankly. Our Bad debt experience is down. Our collection cycles, as you can see, have improved.
It's really volumetric and It's inflation driven. So it's more it's better quality working capital assets of a higher value, but I'll send it over to Jim.
Yes. Thanks Eddie and hi Joel.
Eddie hit
on it. Really the increase in receivables is Simply revenue driven, revenue side driven, our collection cycles are good and really And nothing of any consequence on the bad debt side. So folks are paying current and Really it's just a reflection of the revenue growth.
Okay. And can you give us any sort of Stab at what year end 2022 debt looks like?
Looking out to year end 2022, Joel, I just wanted to really wanted to stay on the safe side of I would say this past is prologue. There was a time, as you know, 6 years ago when we managed With 11 times leverage and we took that high yield debt from $900,000,000 to $650,000,000 Sitting out there at 300 right now and what we indicated in the release is if you look at the trajectory just based on present events, you look at our history, I think you can model very easily where that high yield piece winds up as we come upon our first call. And so we're going to continue to deleverage in the most intelligent way possible. But I think as we also indicated, Given the amount of liquidity we have and given how we see the Ryerson operating model working going forward, We're playing a much better hand than we've been able to play for a long, long time. So we're going to continue to delever So that those multiples stay within that 1 to 2 range throughout the cycle.
And we also think we're going to have opportunities to invest more in the business and return capital to shareholders.
And then just last, while you guys are puffing out your chest a little bit here, is there anything like if we think like Transformatively over the next 5 years, like are there things that really make a lot of sense? Like you always have such a great vision Of where the industry is going and how you guys are going to be unique and all that, is there sort of potential for merger of equals? Or Is it better to focus on sort of building out your technology and being able to support all The EVs and all the different direction that we're going in from a lower carbon standpoint?
Yes. I mean, look, we keep our eyes and ears open. As far as I've always said that There's a little bit of what I'll call safe cracking going on where you got to get one tumbler at a time and you got to take them in the right sequence, you got to take them in the right order. Sequence is really important in terms of when you decide to do certain things. So we did a major acquisition as you know when we did Central And that was a heavy lift and it's working out great and the team has done a phenomenal job.
And I mean everybody involved has done a phenomenal job. So we've shown that we'll take some big swings. But I think right now, the sequence of events is around Building future state systems, getting some capital back to shareholders and really Finishing the work that we've done around the balance sheet, but we'll keep our eyes and ears open. We've got a very strong Bolt on pipeline and we're always running different scenarios, Joel, thinking about what might make really good sense in the future, but getting that sequence right is really important.
Okay, great. There's always the suck up analyst who congratulates the management team, but I think you guys really deserve it this time.
No. Thanks, Joel. We really appreciate it. Thank you.
Okay.
Okay. So it looks like we have no further questions at this time. I'd like to turn it back over to Mr. Eddie Leonard to have any
Thank you very much. We just want everybody out there to stay safe, be healthy, and we look forward to seeing you on our next earnings call. Take care.
That does conclude today's call. We thank everyone again for their participation.