Ryerson Holding's (RYI) CEO Edward Lehner on Q2 2016 Results - Earnings Call Transcript

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Ryerson Holding Corporation (NYSE:RYI) Q2 2016 Earnings Conference Call August 10, 2016 10:00 AM ET

Executives

Christopher Bona – Head of Communications

Edward Lehner – President and Chief Executive Officer

Erich Schnaufer – Chief Financial Officer

Mike Burbach – President, North-West Region

Kevin Richardson – President, South-East Region

Analysts

Joel Tiss – BMO

Michael Gambardella – JPMorgan

Aldo Mazzaferro – Macquarie

Phil Gibbs – KeyBanc Capital Markets

David Olkovetsky – CQS

Operator

Good day, and welcome to the Ryerson’s Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Ryerson’s Head of Communications, Christopher Bona. You may now begin.

Christopher Bona

Good morning. Thank you for joining Ryerson Holding Corporation’s second quarter earnings call. I am 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 two 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 contains 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 served. Forward-looking statements provide our current expectations or forecast of current 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 refer to several non-GAAP financial measures, including adjusted EBITDA and some that exclude LIFO expense or incomes that make adjustment for certain items such as impairment charges and assets and gains or losses and 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 second quarter 2016 earnings release filed on Form 8-K yesterday, which is available on the Investor Relations section of our Web site.

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

Edward Lehner

Thank you, Chris, and thank you all for joining us this morning. I have to start my comments by complementing the outstanding work of my Ryerson colleagues and thanking our customers.

In an industry that contracted year-over-year reflecting consecutive year of industry contraction, Ryerson achieved margin expansion and captured further market share gains. In fact, gross margins expanded to the highest level in more than nine years. And our volume growth outperformed the metal service center industry in each of our product categories.

Our expense and working capital management continued to outperform our public peer group. As a result, we reported diluted earnings per share of $0.17 in the second quarter of 2016 for [technical difficulty] per share, excluding impairment charges on assets and loss on retirement of debt.

Net income attributable to Ryerson Holding Corporation was $5.6 million or $16.9 million on an adjusted basis. Adjusted EBITDA, excluding LIFO was $56 million, nearly double the year ago period. Moreover, with the refinancing of our debt and subsequent equity offering, we extended debt maturities, enhanced our credit profile, and put Ryerson on a glide path to further de-lever our balance sheet.

In May 2016, we issued $650 million of 11% notes due 2022, and redeemed all the 9% notes due in 2017, and repurchased $95 million of the 11.25% notes due in 2018. In July, Ryerson issued 5 million shares of common stock at a public offering price of $15.25 per share before underwriting discounting conditions generating net proceeds of approximately $70.6 million. These proceeds will enable us to further reduce debt and fund growth initiatives.

Our progress across the income statement in the balance sheet is a reflection of the right strategy and the ability of the organization to execute our plan. The themes we have outlined, operating with speed, leveraging our scale, providing value add processing and services, creating a customer experience driven culture and using analytics to better serve customers and operate with maximal efficiency, have become part of Ryerson’s DNA. It is what enables us to provide excellent and repeatable customer experiences and a network inherently more valuable manner.

From a macro standpoint, the world continues to surprise while careening from headline to headline, let’s return to our prevailing view that with the exception of certain developing economies the world is underinvested in long term productivity enhancing capital. Deflation is still the overriding risk to growth as real commodity and primary metal production costs are distorted relative to the clearing prices for these products. Investment in physical assets most notably infrastructure and machining equipment is at the low end of historical norms.

Massive misallocations of capital into commodity and primary metal producing capacity have caused large economic dislocations as the global economy has been working through since 2009. Looking at current indicators, while mixed overall, a detailed read of the ISM’s July report shows five consecutive months of manufacturing growth. Most interesting is that the average PMI from January through June of 2016 of 51.1 co-relates to real GDP growth of 2.5%, yet GDP growth was 0.8% in the first quarter of 2016 and 1.2% in the second, well under PMI expectations of growth.

Consequently growth may remain slow over the short term. However conditions for stronger growth are budding as industrial inventories are lean and important industrial end markets appear to be closer to exiting bottoming conditions.

For the metal service center industry, demand is measured by MSCI volume figures are still down year-over-year with a decline of 5.3%. On a sequential basis though, service center industry volume improve 2% yet long term investment in capital equipment and infrastructure remained below historical averages and these issues are now prominent and trending in the public discourse.

Carbon and stainless tray cases piled over the past four months in the U.S. are being decided in a manner consistent with the domestic mill plainer's [ph] claims around dumping and subsidies. To date, the rulings in these cases have supported price stabilization and price increases in the U.S. market for carbon sheet, carbon plate and stainless sheet products. Moreover, tray case filings are increasing the world over given China’s recent filings on grain oriented electrical steels and Europe’s levying of cold rolled carbon sheet duties on shipments from Russia and China among others.

Successful trade case determinations have slowed the rate of carbon and stainless sheet imports while pricing has improved as a function of import prices and trade case impacts. During the second quarter hot rolled carbon prices measured by the CRU were up 56%. Nickel and Aluminum as quoted on the LME had single digit gains in the second quarter, while aluminum prices remained stable in July, Nickel prices increased 11% with indication of further price increases in the second half of 2016.

It is important to note with respective prices that LME aluminum and nickel are still trading under the respective year ago spot prices although nickel is trending higher recently while HRC CRU prices expanded $68 a ton in the first quarter and $108 per ton in the second quarter such that service center price realization lags carried through most of the second quarter.

Consequently, we expect higher average selling price stabilizations for the balance of the year against rising inventory replacement costs. As we articulated at the top of the call, Ryerson has continued to gain market share. In contrast with MSCI shipments which declined 5.3% year-over-year in the second quarter of 2016, Ryerson’s volume has expanded 3.5%. We also exceeded the MSCI sequential gain with a 5.6% expansion in volumes compared to 2% growth for the MSCI.

Market share growth during accounted [ph] industry contraction positions us well when price and demand move towards mid-cycle levels. We should note that current monthly industry shipments are 25% lower than average monthly shipments for the period 1993 through 2007 implying a demand deficit that is yet to be cured from 2009.

This represents a tremendous opportunity for Ryerson as our company transformation intersects with secular demand growth in the coming years. On an end market basis demand was mixed. Year to date higher tons sold to most of Ryerson’s end markets was offset by significant declines in oil and gas and commercial ground transportation. Sequentially, Ryerson’s ton sold in the second quarter were up for most dense markets with gains in construction and a consumer sector consistent with macro trends.

Shipments to the grounds transportation, oil and gas end markets also improved on a sequential basis although still lower year-over-year. Our strong second quarter performance driven by margin and market share expansion with the result of excellent execution across the organization in support of a strategic plan implementation for Ryerson, that is still in the early innings, we are leveraging Ryerson’s scale in integrated service center network to enhance customer experiences and operating efficiency for building sustainable competitive advantages to fuel profitable growth.

With that, I will turn the call over to Erich who will discuss the highlights of our second quarter performance.

Erich Schnaufer

Thanks, Eddie, and good morning. Ryerson made significant progress again during the second quarter of 2016 improving both the income statement and the balance sheet. We have strengthened our balance sheet with the completion of our $650 million debt offering in May and raised net proceeds of approximately $70.6 million with our equity offering in July. These offerings enable us to extend our debt maturities and to further de-leverage the balance sheet. After the redemption of the remaining $48.5 million of 11.25% notes which we expect to complete by the end of 2016, we will have no significant debt maturities until 2020.

Pro forma net debt as of June 30 adjusted to reflect the equity offering in July and the use of proceeds to repurchase or redeem all of the outstanding 11.25% notes due 2018 has been reduced further to $881 million. That represents a reduction of $77 million or 8% in the year end 2015. Revenue of $739.8 million for the second quarter of 2016 was down 12% year over year as a 3.5% increase in tons shift was more than offset by a 14.9% decline in average selling prices.

Sequentially revenues increased 5.3% as a 5.6% gain in tons shift was slightly offset by a 0.3% decline in average selling price. As Eddie said, our year over year and sequential volume gains surpassed MSCI levels at the same time we captured substantial expansion in gross margins.

Gross margins increased to 22% in the second quarter 2016 up 230 basis points year over year. Gross margin excluding LIFO was 21.1%, a 580 basis points increase from the second quarter of 2015. Average selling prices declined slightly to $1,465 per ton in the second quarter. Our prices bottoms in April and May and begins to rise in June and July. We witnessed a pricing lag across the service center industry while players across the value chains digested the headline mill and industrial metal commodity price increases. Given the lag and the pricing evidence we can see in our monthly trends, we expect the average selling price to rise through the third quarter of 2016.

We also continue to effectively manage inventory with Days of Supply or DOS of 74 days in the second quarter. This is the lowest level we have achieved in at least 4 years. Moreover we have used analytics to ensure we have the right inventory in the right places and meet customer's demands across our interconnected network of service and processing centers.

Diluted earnings per share were $0.17 in the second quarter of 2016 compared with $0.42 in the first quarter of 2016 and $0.49 in the second quarter of 2015. Excluding gains or losses on the retirement of debts and impairment charges net of tax, as reflected in the reconciliation included in the earnings release adjusted diluted earnings per share was $0.52 in the second quarter of 2016 compared to $0.26 in the first quarter of 2016 and $0.54 in the second quarter of 2015.

As Eddie highlighted, Ryerson’s solid execution including margin expansion, market share gains and expense control produced higher adjusted EBITDA excluding LIFO of $56 million compared with $37.2 million in the first quarter of 2016 and $29.2 million in the year ago period.

Year-to-date adjusted EBITDA excluding LIFO is $93.2 million compared with $65.1 million in the first quarter of 2015. Demonstrating our operating leverage per ton operating expenses was down in the second quarter of 2016. Warehousing, selling, general and administrative expenses declined $1.1 million or 1% while our tons shift increased 3.5% year over year.

Cash flow from operations was $2.6 million in the first six months of 2016 compared to $162.9 million in the prior year when we generated strong counter cyclical cash flows. We maintained solid liquidity during the second quarter. As of June 30, 2016, borrowings were $330 million on our primary revolving credit facility with additional availability of $219 million, including our cash, marketable securities and availability from foreign sources, total liquidity was 292 million, which is up 90 million since December 31 of 2015.

Now, I will turn the call back over to Eddie to conclude.

Edward Lehner

Thanks, Erich. Looking ahead, we will continue executing Ryerson's strategic built on perpetual DNA elements of speed, scale, value-add, culture, and analytics. The sustainable competitive advantage in our industry is the quest to perfect the customer experience. By focusing on that with passion, energy, and target investments, we become an indispensable partner in our customer success.

As we are providing guidance moving forward, we have adopted what we consider a good and established practice in our industry. In the future, we intend to release guidance in the third month of each quarter, providing commentary on business conditions and certain financial measures of anticipated quarterly performance. We look forward to our next update in September.

For now our near term capital markets work is complete as balance sheet risks have been competently addressed. We can focus our attention on the execution of our growth initiatives in further de-leveraging of our balance sheet.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Joel Tiss from BMO.

Joel Tiss

That must be some kind of mistake; I never get to go first.

Edward Lehner

I was going to say you’re pretty quick on the trigger this morning, Joel.

Joel Tiss

Yes. Receivables and inventories seem like they are up quite a bit from the end of the year, is that just normal seasonal, or is there anything else in there?

Edward Lehner

No, I mean our turnover ratios improved. Cash conversion cycle got better, Joel, so we invented some inventory because of our growth in tonnage and volume, and it’s really nothing more than that.

Joel Tiss

Okay. And I know you don’t want to give guidance, but can you give us interest expense, just a sense of where you think it’s going to come after the third quarter or you could fuzz it up for the second half, just so we have a sense of where to think?

Erich Schnaufer

Yes, so as far as our interest expense goes, post our equity offering after we take out the 11.25% notes, we will have a run rate of about $20 million of cash interest expense that would be for $650 million notes that are outstanding to ABL and the foreign debts that we have.

Joel Tiss

Per quarter?

Erich Schnaufer

Yes, per quarter run rate.

Edward Lehner

Joel, one thing I wanted to append on my answer regarding assets is, I will say this and I really want to complement our entire organization, the quality of our assets keeps getting better and better and what I mean by that the composition of the inventory and the composition of our fixed assets and the efficiency by which we turn those assets, there have been significant improvements in our organization over the last five or six years. It’s been constant and continuous, so I think we are missing to point that out.

Joel Tiss

And are you, I will just glue the two together so I can make way for other people, you expect to see pure selling days in 2016 and also are you seeing any expenditure shutdowns in August from your customers to try to balance supply demand a little better?

Edward Lehner

I’m going to let Mike and Kevin shag the question on outages, I would just give you some general commentary that outages were more extended and prolonged in July and we see our customers coming back online in August but you could get to hear from Mike and Kev on that.

Kevin Richardson

Hey, Joel, Kevin Richardson, the only outages that we see in August which is maybe a little untypical relative to July is in the transportation industry. We are seeing some corrections particularly in the rail and Class 8, but other than that we are not seeing any shutdowns in August.

Mike Burbach

Sorry, Joel, Mike Burbach here, I would say fewer selling days, nothing other than what the traditional second half of the year looks like from a calendar perspective but echoing Eddie’s comments the July shutdowns, we saw those typical to maybe extended in some cases but August is more or less plain out normal.

Erich Schnaufer

And Joel, this is Erich, as far as our shipping days, we will have 64 shipping days in the third quarter which is the same as the first and second quarter this year and the fourth quarter will have 60 shipping days, four days less.

Edward Lehner

So I mean the thing is, we always have this factor into our thinking, it’s just how long is the holiday weekend really? So July 4 tends to be extended, that holiday seems to extend to really two to three days as opposed to the calendar one day and then of course you have Thanksgiving and Christmas and New Year. So in the second half, in a [technical difficulty] for one of you, it’s less shipping days.

Joel Tiss

Great, thank you so much.

Edward Lehner

Sure, thank you.

Operator

We will take our next question from Dan Schultze [ph] with Schultze [ph] Asset Management.

Unidentified Analyst

Gentleman thanks, really nice job on reducing that debt. That's very impressive, I got my questions answered, but that’s fine. So great topping, keep on pressing on that, that’s a critical thing as I know you know but I got my questions answered, so good job on that.

Erich Schnaufer

Thank you.

Mike Burbach

Thanks.

Kevin Richardson

Appreciate that.

Operator

[Operator instructions] We will take our next question from Michael Gambardella with JPMorgan.

Michael Gambardella

Hey, good morning, congratulations on the quarter and also on the hard work you have done and your whole team on the balance sheet and the operations over the past year or so.

Edward Lehner

Thanks, Michael.

Michael Gambardella

Just wanted to see if I could get some more color on the market share gains you have made either by end market product or geographic locations?

Edward Lehner

Yes, I’m going to give this over to Mike and Kevin, Michael, but let me give you some broad commentary. So we said strategic plan and we are executing very well on that strategic plan and we have seen games in stainless, we have seen games in transactional business where we can really get at the fragmentation in our industry and we continue to really grow down on this idea that we have to engage customers 24 hours a day, seven days a week based on their preferences but we want to be in front of the customer and there are very structured method by which you can do that. We have been doing that, we have been successful doing that and we will continue to do that. In terms of end market strength, we have seen strength in food processing, we have seen strength in construction and we have seen strength across the consumer space and I would like Mike and Kevin to append to that.

Mike Burbach

Michael, this is Mike Burbach, say looking at the market share gains by product, as Eddie mentioned we have seen gains across all the products we distribute probably a little bit larger in stainless than the others but there has been positive movement in all fronts. I would say there is really not a geographical issue going on here, we have seen it across all markets maybe with the exception of areas concentrated with oil and gas that may play little bit different story there but I would have to say the growth is really a function of everything that we have been working on and executing the strategy. We have had great execution across all fronts focusing on the customer and speed and putting the right inventory in the right place. So good chunk of this I think has to be attributed to the asset management that we have successfully improved and been able to respond to customer's requests quicker leveraging resources all across the Ryerson network, but Kevin you may have some additional end market color too.

Kevin Richardson

Well, the only other thing that I would add, Michael, as in Mike touched on it very broad based, geographically and given the fragmentation of the market, the market share gains that we see is not necessarily from one competitor. So it’s not like there is a war being waged which is a good thing. So it’s coming from a lot of places, it’s coming from transactional and in some cases contract accounts but Mike’s comments on end markets is, I would agree with him.

Michael Gambardella

And second question, do you have any exposure on the [indiscernible] in terms of being the import of record and dealt with some of these [indiscernible]?

Edward Lehner

Yes, Michael, we have none.

Michael Gambardella

Okay, thanks for that.

Edward Lehner

Thank you.

Operator

We will go next to Aldo Mazzaferro with Macquarie.

Aldo Mazzaferro

Hi, Eddie. Hi, Erich.

Erich Schnaufer

Good morning.

Edward Lehner

Good morning.

Aldo Mazzaferro

Yes, good. Hey, very impressive you know gaining market share and raising margins at the same time and even more impressive I think raising margins while your prices decline sequentially. You must have a major catch up potential against the CRU, I am just wondering is it crazy to assume a double digit percentage increase in pricing sequentially in third quarter.

Edward Lehner

Aldo, too soon to know, really too soon to know. I mean there has been a lag as we mentioned in Q1 and Q2 and CRU pricing on the carbon side is heading the other way, but you have got strength in stainless it’s emerging and the second half of the year with aluminum being neutral. Right now we are about 50% carbon, about 25% stainless and 25% aluminum. So we have a good mix to realize the benefits of higher ASPs moving to the back side of the year, really just it comes down to probabilities right. So probabilities of how far does anybody expect this year the prices to come down, they have retraced somewhat in the last 30 days, and then how much is that an emergent [indiscernible] offset that and then how most of those CRU averages on contract of programs pull up our ASP in the second half of the year. So AMP be trending higher but too early to say it if we get that do we get to that double digit level or not.

Aldo Mazzaferro

So when it resets for the third quarter aren't they -- are they using July 1, right on a three month yield right?

Edward Lehner

Yes on a three months yield, but our programs and contracts are at difference stride. Some are monthly, some are quarterly, some are quarterly with a 30-day lag attached to it. So they don't all move in hand and you get hand together, but they are all moving up.

Aldo Mazzaferro

Great. So do you have any comment on your direction of your gross margin sequentially?

Edward Lehner

Yes, I mean, if we just look at the drivers and we look at strength, relative strength and stainless ability in aluminum in the back half of the year, and we look at carbon turning down, just based on those macro drivers of those commodity drivers you would speak to a plateau [Ph] aluminum margins. So the work we have to do is, we have to work around our mix and we have to work around value add, which now that when you bring it back.

So we’ve proven ourselves at managing within these cycles quarter-to-quarter year-over-year, we don't have a cyclical, we come back into gross and I think the company that it’s more important what we do internal of the business in terms of extending that value add percentage of our mix and really getting more at that transactional business piece while improving the program contract piece to put more supply chain attributes into those negotiations where program contracts are.

So you move beyond price, you go to think like hedging, you go to things like scrap management, you go to things like value engineering, and that's where you can really get incremental margin raise your overall margin profile on the step function manner. You go back and look at Ryerson over the last four, five years; we were in this 16% to 18% gross margin range ex LIFO. And I think our organization position now to take that next step up when we look at a range of margin and we’re going to operate and going to take that next step up to between 18% to 22%. So that's going to be more of a function of things we do internally. And we'll continue to manage the macro drivers really well.

Aldo Mazzaferro

Thank you. Just one last one, I think Michael may have just touched on this a little bit to with this, but there are some stories around about mill lead times coming in for the month of August pretty sharply and there's a little bit of price weakness I guess on the spot market it is on carbon I'm talking about, is there anything you see in the market that would suggest that it's more than the summer seasonal sort or on a really final demand basis for your customers that they are seeing declines in demand or just a seasonal do you think?

Mike Burbach

Aldo, the big variable demand, we’re going away from just what's happening, week-to-week and month-to-month. I think we're still in a very depressed part of the cycle there has been strength in automotive it's been well covered in Chronicle, there’s been strength in aerospace. When you look at the industrial economy and you look at the commentary of Grainger, look at the commentary of Fastenal, look at the productivity metrics that have been released and look at overall levels of investment, looking MSCI shipments. I’m really optimistic moving forward. I don't know exactly what date we start to go net positive in terms of success in investment trends, but this period of time let me break this down and to really two components, of this period of time looks a lot like 1979, 1980 and 1981 for the industrial U.S. manufacturing U.S. And we've been so far under historical averages that this repair bill moving beyond a break-fix economy, this repair bill is just growing day by day by day, and we really think of this place demand and that eventually gets cured. So put that in the side okay.

The second part of that is what happens with in July, August and September, and I think if you look at mill utilization rate 72% with imports starting to creep up. You would speak to demand being stable, but demand not to be in robust once you get beyond automotive pick ups and construction and some consumer related end markets. So there's still a lot of upside in our view moving forward through the balance of 2016 really more so into 2017 and 2018 because we think long term these investment ratios will correct and when they do we think we come into a secular upturn in investment growth.

Aldo Mazzaferro

Thank you, and good luck.

Mike Burbach

Thanks, Alan.

Operator

We’ll take our next question from Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs

Good morning Eddie, Eric.

Edward Lehner

Good morning Phil, how are you?

Phil Gibbs

Good how are you?

Edward Lehner

Good. We’ve been busy…

Phil Gibbs

Well, I see that good job. I have a question on your view of market dynamics in general your customer level, what are they telling you about their inventory levels, their relative -- demand and what are the some of those discussions you feel like, the lead on inventory do you feel like there just as cost, as a service centers are how you reading that?

Erich Schnaufer

Yes, they way we read it, the inventories are getting main and I think folks are being very careful with the working capital investment and they are not taking any long positions inventory that we can see so, we think inventories are lean, getting leaner and will continued to lean out and that’s should -- supply chain out of the equation which if the demand comes back and you believe over the medium to longer term it will that should bring about much better conditions in the industry. Mike and Kevin what do you think?

Kevin Richardson

No, I would agree with that we don’t see customers building inventory there may be a off here and there given the run up in carbon but in general we do not see customers building inventory for sure.

Mike Burbach

I would agree with that.

Phil Gibbs

Okay. And just an accounting question on the LIFO side if you look at asked every quarter but how are we looking into this quarter, how should we think about the mix between that, that LCM reserve and the LIFO expense coming together?

Edward Lehner

Yes, the ways looking right now again with the our average cost of inventories right I think there will be some LIFO expenses however the ways looking for the third quarter right now based on average selling price increases that we are seeing, we’re likely to have in that LIFO income again in the third quarter but I would say in the last half it will be relatively flat the LIFO expenses but last half of the year should offset or getting back on the LIFO reserve income that comes back up the balance sheet.

Phil Gibbs

Okay, so modeling kind of a net impact of zero back half.

Edward Lehner

That is zero for the back half but I think it will be some LIFO income in the third quarter offset in the fourth quarter.

Edward Lehner

So regarding inventories I do think there is a structural change of put which is merging but we are seeing data points around customer, small customers, customers competitors and going out of business and shrinking and some folks -- in their footprint so I think the industry is also adjusting two conditions that have been more less pervasive for long time now so, we are seeing more reverse increase activity with respect to M&A and we’re certainly seen smaller competitors struggle to maintain working capital investments in some cases, maintain their franchisees in the industry.

Phil Gibbs

Some of that upside that you are picking up form a momentum perspective on the volumes does that dovetail with that thought and where in terms of products, medals are you seeing that share gain?

Edward Lehner

Yes, it's more in the harder, areas of long products and play products and the advocators where demand is really shrink more dramatically.

Phil Gibbs

In terms of why you’re picking up share?

Edward Lehner

But we are picking up share across all three states and all three commodities but it's more where you’ve seen real decline and business activity around fabrication, heavy machinery and equipment and so on and so on.

Phil Gibbs

No, in terms of what’s the trust? Okay, okay got it. Thanks so much Eddie.

Erich Schnaufer

Thanks, Phil.

Edward Lehner

Thanks, Phil.

Operator

[Operator Instructions] We’ve follow up from Joel Tiss with BMO.

Joel Tiss

Just two things you gave us a little flavor of some of the stronger end market I want if you could run through all of the bigger ones and give us the good, the bad and the ugly?

Edward Lehner

I - double short, for the good and bad and the ugly so the good has been construction in food processing and the consumer levered more towards the appliance and residential construction as well as non-residential construction I mean that I say the sort of the bumping a long category Joel is more industrial metal fab machine shop and the ugly would be class 8 truck and oil and gas and Ag.

Erich Schnaufer

Mining.

Edward Lehner

And mining; Kevin and Mike, what do you think?

Mike Burbach

No, I would agree with that. We actually saw some sequential improvement in transportation and oil and gas but those were coming off relatively low levels. And as Eddie mentioned in his commentary, year-over-year those are still big declines. So you got to keep that in perspective when you look at the sequential gains. We do see transportation for sure, weaker in the second half coming out of a decent second quarter. In oil and gas we’re seeing some modest improvement but again it's coming off a very low level on an absolute basis. Other end markets give or take flat up a percent down a percent so nothing notable relative to our last quarterly call.

Joel Tiss

And are you allowed or willing to share with us what the ASPs are right now? Because you said they're going to be up in the third quarter, maybe if we’ll have a little bit of a sign post along the way we can kind of guess at how much you mean by up you know a little bit medium a lot whatever?

Edward Lehner

Yes, so it will be probably stepping over the fence line if we give you numbers.

Joel Tiss

Okay.

Edward Lehner

But our ASPs are up.

Kevin Richardson

Hey, Joel this is Kevin. What I will say is the industry always lags between producer increases and getting through the distribution channels. We were surprised at how long that took in some geographies and some product categories. And I think that’s a function of just how taper the demand is as people were very focused on volume. And in some cases we saw distributors selling carbon flat roll to customers below what the no replacement cost might be 30 days later. And so I think our management team did a really good job of trying to find that right balance and obviously we’re trying to look at what the replacement costs are and price appropriately. But what was interesting is you could start to see in certain geographies and certain competitors as they deplete their low cost inventory all of a sudden you would see a big bump off in terms of resale prices. But it was very inconsistent by competitor and geography.

Edward Lehner

So the other thing I would say too -- because you covered the space really, really well, if you've did a heat map across the industrial companies you covering and you looked at that heat map and we see that heat map at our company, you're going to see cold spots in the south central U.S. and Texas and Western Canada. You'll even see isolated cold spots that are levered to class 8 or levered to Ag, or lever to heavy machinery and equipment an then you get to the areas of the country that are more consumer driven. California, Arizona, Washington State, Atlanta, or Georgia, the Carolinas, Tennessee, the Northeast U.S. has been good this year. So you really have to look at it -- we think from a heat map illustration and say, okay, what's hot what's really sort of warm and what really is going cold, and it's pretty revealing if you look at it on that basis the North America.

Joel Tiss

Yes, I've heard the same thing from my industrial companies. That’s great thank you so much.

Edward Lehner

Thanks, Joel.

Operator

We’ll take our next question from David Olkovetsky with CQS.

David Olkovetsky

Hey, Eddie. Hey, Eric. How're you guys?

Edward Lehner

Hi David, doing well.

Erich Schnaufer

Hey David, doing well.

David Olkovetsky

Couple from me; first one with respect to international tonnage, are you guys seeing more offerings from you know non-standard exporters?

Edward Lehner

Once -- okay, David, the answer is a yes. So there are more offers and there were the last time we were together on -- on Q1 earnings call. More offers are coming in but I wouldn’t say the pace of offers is dramatically more than it was, but it is more.

David Olkovetsky

Okay. And if you were to place an order today I mean from somewhere in say Eastern Europe or Asia or talking about January time frame for arrival?

Edward Lehner

It would depend what you would be looking at late November, December and in the January in some cases.

David Olkovetsky

Okay, great. And then can you just give me a sense for what percentage of the volume that you're buying is on a CRU basis versus like a spot -- I know I think Mike might have asked that question earlier, but you know I'm just looking for the last year are you contract basis versus anything other than that?

Edward Lehner

Sure. I would say our commercial activity that’s tied to some form of CRU pricing whether it's one month three months or some hybrid. It's about 25% of our overall revenue.

David Olkovetsky

Okay, and that’s -- so sorry, is that specifically for the carbon side or overall for the entire business?

Edward Lehner

It's for the entire business, but that’s mostly a function to carbon.

David Olkovetsky

Okay, got it. And then if -- are you guys buying aluminum from the -- from, like, Alcoa, Novelis, or is it directly from the warehouse?

Edward Lehner

Directly from the warehouse, so we’re primary aluminum and aluminum products in majority from domestic suppliers. So the domestic mills whether it be Alcoa, Novelis, Kaiser and others.

David Olkovetsky

Okay. And then if I could just one more before a couple of quick housekeeping; what the dynamic you're seeing right now between your customers and yourselves in the carbon business? And obviously, you're talking about demand being a little bit weaker year-over-year and I'm trying -- are your customers who are well educated are they looking at the divergence between international prices and domestic and basically reducing purchases on the expectation that domestic carbon prices are going to drop? Is that the sort of dynamic that we’re seeing?

Edward Lehner

David, it's been a lot I've been reading a lot about this standoff. There's this -- its used to be -- you would think that we have some kind of orchestrated televised standoff between a customers and suppliers. Let me state it this way, I think people buy to a level of demand they have and a level of firm demand that they have and if there was really extended firm demand backlogs evident across the industrial space people would buy to that. So I do think demand is weak. We see signs moving beyond 2016 that demand should pick up, and demand is within a range of what it's been all year in 2016.

So to a question what was asked earlier, so I think customers are being careful. I think they're being very careful in terms of not wanting their inventories to devalue and I also think that the amplitude of the modulation and the volatility of working capital investment have made people very conservative in how they look at how they look at taking positions in inventory.

David Olkovetsky

Okay wonderful. And then couple of very quick ones for Eric if it's okay. As I'm still looking at your adjusted EBITDA line, can you just walk me through where the following three things sit on the income statement, foreign currency translation losses, purchase consideration and other transaction costs and then reorganization?

Erich Schnaufer

Yes, the reorganization and purchase consideration that’s running through warehousing, selling, general and administrative expense. And then the foreign currency is typically going through other income and expenses.

David Olkovetsky

Okay, wonderful. Got it. Thank you so much. I appreciate it.

Edward Lehner

Thank you.

Erich Schnaufer

Thank you.

Operator

We’ll take our next question from Jorge Beristain with Deutsche Bank.

Unidentified Analyst

Good morning. This is actually Jeremy stepping up for Jorge.

Edward Lehner

Hi Jeremy.

Erich Schnaufer

Hey, Jeremy.

Unidentified Analyst

Hi, I just had a kind of question on your under customers and they’ve been trading out their typical carbon purchases for stainless steels or aluminums, I guess that should be again market demand and substitution factors.

Edward Lehner

Have they -- have customers been substituting one metal for another?

Unidentified Analyst

Right.

Kevin Richardson

Hi Jeremy, this is Kevin Richardson. I would say the only thing that we see in terms of a theme is definitely light weighting where people are trying to take wait at a different things and that’s mainly the transportation sector. And so that could be anything from a typical commercial quality carbon to a high strength low alloy where they're taking where they're down-gauging it or in some cases maybe a movement from carbon to aluminum and I think that’s one thing that really plays to our favorite because we’re relatively agnostic in terms of the type of metal. So we would be able to go in and work with our customers if -- instead of if we were only selling carbon or only selling aluminum. But other than the transportation industry we don't see any big movement in fact a lot of the applications that require stainless you can't move to different products.

Unidentified Analyst

All right, thank you very much. And then little bit more clarity on your working cap; you are supposed to bounce back and build up, is that more of a 4Q type thing or that you think it will bounce back sooner than that in 3Q?

Edward Lehner

Jeremy, we missed the first part of your question. Could you repeat -- could you tell up the volume a little bit?

Unidentified Analyst

Working capital, is that going to bounce back in more of a 3Q or is it later in the 4Q, do you think it will move buyback?

Edward Lehner

The working capital or the generating operating cash flow?

Unidentified Analyst

Generating cash flow from working capital.

Edward Lehner

Yes. So we see Ryerson generating positive cash flow through the second half of the year, and that will start to build towards -- as we get to the end of Q3 and start moving through Q4. That countercyclical nature of cash flow generation will kick in towards the end of Q3 and through the balance of Q4.

Erich Schnaufer

And in Q4 we typically throw up quite a bit of cash.

Unidentified Analyst

Okay, thank you.

Operator

I think our next question is from Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs

Yes, Eddie, I just wanted to clarify something. You mixed versus contract business versus spot business right now and then also within that contract business typically how much of that is call managed or negotiated pricing versus just having the volume aspect?

Edward Lehner

Still on -- based on revenue, as a function of revenue it's about 25%.

Phil Gibbs

You say contract is 25?

Edward Lehner

Yes, contract is 25 of the function of revenue.

Phil Gibbs

As a function of revenue, okay, and that…

Edward Lehner

Are you asking what transactional versus contract?

Phil Gibbs

I just remembered the color last quarter was about 50-50 contract versus transaction or spot, and so I’m trying to [indiscernible] versus the comments on the CRU you made.

Edward Lehner

Yes, let's parse that out. So let's just say its 50-50 and the transactional is a little more than that, let's just say it's 50-50. Half of that 50 is tied to CRU pricing indexes, so half of the half so 25% of that 50. I'm sorry 25%, right, but 50% of…

Phil Gibbs

Yes, half. Okay. So when you say contract is that based more or less on volume, existing volume commitments with a customer that but you could have more of a spot type pricing arrangement within that contract?

Edward Lehner

With some, yes.

Phil Gibbs

Okay, all right. That makes sense, appreciate it.

Edward Lehner

Thanks, Phil.

Erich Schnaufer

Thanks, Phil.

Operator

That concludes today's question and answer session this time I’ll turn the conference back to Mr. Eddie Lehner for any final remarks.

Edward Lehner

We’ve come a long way in a short time and changed the narrative of our company. Ryerson’s transformation has gained momentum, position enough to continue to take market share and benefit longer term from secular industrial growth. We look forward to talking with you again next quarter and appreciate your support of an interest in Ryerson.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect.

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