Ryerson Holding's (RYI) CEO Edward Lehner on Q3 2016 Results - Earnings Call Transcript

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About: Ryerson Holding Corp. (RYI)
by: SA Transcripts

Ryerson Holding Corp. (NYSE:RYI) Q3 2016 Results Earnings Conference Call November 3, 2016 10:00 AM ET

Executives

Jeff Horwitz - IR

Edward Lehner - President and CEO

Erich Schnaufer - CFO

Mike Burbach - President, North-West Region

Kevin Richardson - President, South-East Region

Analysts

Brett Levy - Loop Capital

Phil Gibbs - KeyBanc Capital Markets

Martin Englert - Jefferies

Jorge Beristain - Deutsche Bank

Phil Gibbs - KeyBanc Capital Markets

David Olkovetsky - CQS

Aldo Mazzaferro - Macquarie

Operator

Good day, and welcome to the Ryerson's Third Quarter Earnings Conference Call. Today's conference is being recorded.

At this time I would like to turn the conference over to Jeff Horwitz with Ryerson's Investor Relations Department. Please go ahead.

Jeff Horwitz

Good morning. Thank you for joining Ryerson Holding Corporation's third quarter earnings call. I'm here this morning with Eddie Lehner, Ryerson's President and Chief Executive Officer, and our Chief Financial Officer, Erich Schnaufer. Kevin Richardson 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 contain forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those implied by the forward-looking statements. Such risks and uncertainties include, but are not limited to, those set forth under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2015.

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, including adjusted EBITDA, and some that exclude LIFO expense or income or that make adjustments for certain items such as restructuring and other charges, impairment charges on assets and gains or losses on retirement of debt. 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 third quarter 2016 earnings release, filed on Form 8-K yesterday, which is available on the Investor Relations section of our website.

I'll now turn the call over to Eddie.

Edward Lehner

Thank you, Jeff, and thank you all for joining us this morning. I want to start by thanking all of my Ryerson teammates who performed admirably during the quarter characterized by short pivot in demand and volatility in carbon steel pricing.

Underscoring the demand and pricing shift during the third quarter, our service center industry shipments declining by 5% sequentially while benchmark spot index carbon hot rolled coil prices fell $120 per ton or 19% in the quarter.

In spite of this backdrop, we achieved solid gross margins, excluding LIFO of 20% in the third quarter. As a result, diluted earnings per share were $0.23 in the third quarter of 2016, or $0.28 per share excluding restructuring and debt retirement charges.

Net income attributable to Ryerson Holding Corporation was 8.2 million or 10 million on an adjusted basis. Adjusted EBITDA excluding LIFO was 48.8 million, up over 60% from the year ago period.

Moreover, we further deleveraged our balance sheet to a primary equity offering of $5 million shares, the proceeds of which were used to redeem our remaining 11.25% senior notes due in 2018, subsequent to the end of the quarter.

Our continuing progress across the income statement and balance sheet reflects the ability to execute our strategy by delivering excellent and repeatable customer experiences. Our organization's DNA is furthering our ability to operate with speed, leverage our scale, provide value-added processing and services, create a customer experience driven culture, and use analytics to better serve our customers and operate with maximal efficiency.

Through the first three quarters of 2016, we have continued deleveraging our balance sheet, improved our capital structure and gain market share, all affirming and validating points along our transformational path forward.

From a macro standpoint, weakness in the industrial sector remains a challenge even as finished steel imports have fallen to approximately 25% of finished steel demand in 2016 from 2015 finished steel import levels above 30%.

This weakness is further exhibited by mill capacity utilization rates below 70% and U.S. industrial output contracting for the 13th straight month. A strong dollar and long-term capital investment well below historical norms are negatively impacting overall economic growth and productivity simply put the U.S. continues to under-invest in itself to our collective detriment. It is also true that the adverse impacts from such underinvestment are cumulative and corrosive.

Despite the challenges noted and monthly metal service center industry shipments did decline by more than 25% on average from 2009 to the third quarter of 2016 as compared to average monthly service center industry shipments from 1993 through 2008. We continue building a more dynamic and responsive organization with enhanced capabilities for all seasons.

Once removed from a secular bottoming of industrial demand and as industrial demand and capital investment return to expected normative levels, Ryerson plans to further leverage its market share gains of the past two years to generate attractive growth opportunities.

On the supply side, affirmative trade case determinations in 2016 have contributed to recent declines in carbon and stainless steel import levels. At present import offers are receding as are the price spreads between domestic and offshore carbon sheet and plate products

Notwithstanding, the decline of CRU carbon sheet prices from a peak late in the second quarter of $637 per ton to $473 per ton at the end of October, signs of supply side price stabilization are emerging, whereas, the supply side was the greater of the twin problems causing price deflation and shipment contraction a year ago, demand is the joker in the deck this time around as the industry shipments have continued to decline despite industrial base metals prices trending higher since bottoming during the fourth quarter of 2015.

North American industry demand as measured by the MSCI is down 6.9% year-over-year to the first nine months of 2016. During this period of contracting demand, however, we have been able to profitably expand our market share in all product categories, growing shipments by 0.5% year-over-year to the first nine months of 2016, while expanding gross margins.

Average selling price has increased in the third quarter to $1,531 per ton, up $66 per ton or 4.5% from the second quarter after six consecutive quarters of declines. The increase in average selling price was muted within the quarter as the duration of spot carbon steel price increases did not sustain long enough to become fully priced in the market.

For perspective, within a 180-day period between the start of the second quarter and the end of the third quarter were 2.25 inventory turns bellwether, hot rolled sheet pricing rose approximately $a $180 per ton before falling $a $120 per ton causing service center whiplash.

Given that global steel prices have risen, fallen and now firmed, Q4 benchmark HRC prices appear to be settling into a $470 per ton to $500 per ton range with a more than $50 per ton contango between the current spot price and futures price.

Turning now to end-markets. Ryerson's end-markets on a sequential basis saw volume declines in transportation, oil and gas, construction, HVAC, and industrial equipment with consumer durable equipment being the lone bright spot.

This is in contrast to year-to-date end-market data, which saw gains across food processing, consumer durable and construction equipment. Clearly third quarter industrial demand weakness was broad based as declining end-markets. Well outpaced expanding end markets.

Despite the continuing refrain of a challenging industrial environment we are wholly engaged and immersed in a self-help effort that is making Ryerson a better company in every respect.

Given that industry shipments have contracted 15% since the third quarter of 2014 while Ryerson's has gained market share and expanded margins over the same period the work doing is building an intelligent and connected network of service centers providing industry-leading customer experiences.

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

Erich Schnaufer

Thanks, Eddie. And good morning Ryerson showed resilience in the third quarter, realizing strong gross margin, excluding LIFO of 20% despite rising inventory costs and continued to demonstrate effective expense management.

We generated net income attributable to Ryerson holding Corporation of 8.2 million. Excluding restructuring and debt related charges adjusted net income attributable to Ryerson holding Corporation, was $10 million in the third quarter.

At the same time, we do leveraged our balance sheet with the proceeds from our primary equity offering in July. Total debt declined sequentially by 50.5 million or 5% to 978 million in the third quarter of 2016. And with the October redemption of the 2018 notes we have no significant debt maturities until the year 2020.

Revenue of 735 million for the third quarter of 2016 was down 6.9% year-over-year as average selling price has declined by 4.7% and tons shipped fell by 2.4%. Sequentially, revenues were slightly lower down 0.6%. The result of a 5% decline in tons shipped, partially offset by a 4.5% increase in average selling prices.

The third quarter saw gross margin expand to 19.8% from 19% in the third quarter of 2015. Gross margin, excluding LIFO, was 20% in the third quarter of 2016, up 370 basis points from the prior year period. Sequentially, gross margin compressed by 220 basis points and gross margin, excluding LIFO, was down 110 basis points. Margin performance, while negatively impacted by carbon's abrupt about face was tempered by relative stability in aluminum and stainless inventory costs and average selling prices.

Ryerson continues to be an industry leader in inventory management with days of supply, or DOS of 78 days in the third quarter. DOS is up 4 days from 74 days in the second quarter due to weaker than anticipated demand. We expect to destock inventory in the fourth quarter to better align with demand and to generate countercyclical cash flows.

Moreover, we continue to use and enhance our analytical framework to ensure we have the right inventory in the right places across our interconnected network of service and processing centers, enabling us to improve service levels to our customers.

Warehousing, selling, general and administrative expenses declined $4 million, or 3.5% in the third quarter compared to the second quarter of 2016, reflecting the results of our continuing expense management initiatives and realized operational efficiencies.

Diluted earnings per share increased to $0.23 third quarter of 2016 compared to $0.21 in the third quarter of 2015 and $0.17 in the second quarter of 2016. Excluding gains or losses on the retirement of debt, restructuring charges, and impairment charges on assets, net of tax, as reflected in the reconciliation included in the earnings release, adjusted diluted earnings per share was $0.28 in the third quarter of 2016 compared to $0.20 in the third quarter of 2015 and $0.52 in the second quarter 2016.

Overall, Ryerson's solid execution produced adjusted EBITDA, excluding LIFO of $48.8 million compared to $29.7 million in the third quarter of 2015 and $56 million in the second quarter of 2016. Year-to-date, adjusted EBITDA, excluding LIFO increased nearly 50% to $a $142 million compared to $94.8 million in the year ago period. Cash used in operations during the first nine months of 2016 was $22.9 million, compared to $192.6 million of cash provided by operations in the first nine months of 2015.

We anticipate that Ryerson will generate positive cash flow from operations for the full year ending December 31, 2016 as we reduce our inventory during the fourth quarter to appropriate levels consistent with anticipated market conditions.

Finally, we maintained solid liquidity during the quarter. As of September 30, 2016, borrowings were $277 million on our primary revolving credit facility with additional availability of $295 million including our cash, marketable securities and availability from foreign sources, total liquidity was $364 million, which is up $91 million since December 31 2015.

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

Edward Lehner

Thanks, Erich. I want to thank our customers for their business, as we continue building a better Ryerson committed to your success. We send our wishes to all for a healthy, safe and happy holiday season and with that let's open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Brett Levy with Loop Capital. Please go ahead. Your line is open.

Brett Levy

Hi, Eddie. Congratulations on a number of things, certainly including the cubs. Also - Eddie, Erich and Jeff congrats on a good quarter. As you see some of these like end market dynamics and you think about your own plans going forward, are you thinking about growth markets is, establishment or purchase of something in Mexico on the list. Just kind of talk - it looks like you stabilized result and liquidity in a very significant way over the last of couple years. Can you talk about growth from this point and sort of what the priorities are?

Edward Lehner

Hi, Brett. Thanks I know it's a big day in Chicago today. Lot of our cubs gear on the street. So as far as growth goes look we are going to continue to delever the balance sheet what we said since our IPO is that with every dollar of free cash flow we look to take about two-thirds of that and apply that to debt reduction, take about one-third and apply that to selective and really attractive growth opportunities. I mean, we are certainly pleased with our progress in Mexico taking it one step at a time in Mexico we have a great management team down there and they've done really well.

But really I'll tell you Brett, - our best play right now is to continue to drive our organic growth, continue to drive our strategic plan. We have a healthy bolt on acquisition pipeline and as opportunities move to a point of really high attractiveness we'll act.

Brett Levy

All right. And then, I mean, can you talk about kind of CapEx going forward that sort of thing - I guess, I am really wondering, is the buy option or the build option more appealing to you at this point?

Edward Lehner

It's really a combination of both. We are going to look if you think about the strategy we put forward, we are going to look at high value add opportunities. There is still a lot of capacity around cut to length processing, still a lot of capacity in basic plate burning and bar cutting and lot of those ends markets are pretty depressed. Brett if you go back and I reference this in the script, I mean if you really look at industry shipment contraction and price deflation over the last two years. The good news is there's a bottoming taking place and I think it's a secular bottoming.

And if you look at things that are going on in China. If you look at supply-side stabilization, you look at pricing levels globally. Certainly, there's a case to be made that once we get through Q4 as another transition quarter things look better, even at low levels of demand things look better as pricing stabilizes. And so I think organic growth and really building upon the progress we made in our market share gains and the things we're doing to underpin those market share gains that's our best play while trying to capitalize on good bolt on acquisition opportunities that really reflect value add further away from the commodity cold phase.

Erich Schnaufer

And Brett, this is Erich. Just a supplement, on CapEx, we typically spend somewhere between $20 million to $25 million a year on CapEx $10 million to $15 million of that is maintenance CapEx, with the rest of it going after growth CapEx where we have additional processing capabilities that we want to bring online.

Edward Lehner

Yes. And those value added capabilities we've done that this year and I would say that the opportunity that we speak to and you can see it in our prepared comments and in our answers during the Q&A is we're very committed to the idea of mapping the assets, mapping the assets and mapping the inventories, where there are still surpluses and there is opportunities to use that capacity in very productive ways by engineering much better speed around the transaction and design much better supply chains around program contract business. So that's an opportunity we continue to develop within the company.

Brett Levy

Last question. In terms of the gains in market share, what do you think you're doing, is it big guys taking the shares from little guys? Is it a shift to more value added, all of the above as you look sort of in the rearview mirror and say why did we gain this market share. Do you have a good answer to that question?

Edward Lehner

Yes, I'm going to go ahead and kick it over to Mike and Kev to supplement. But I'll give you this color and that is most of our growth in market share has been on the transactional side, which is healthy, which is good because we haven't lost here on the program contract side, it's just that a lot of that business has been slower. If you look across different end markets in mining, Class 8 truck, agriculture and really the big downer in the quarter was construction.

I mean if you look at construction there's three consecutive months of contraction in construction spending during the quarter. So that was the difference maker in Q3. But when we look at our market share gains we're seeing Ryerson as an organization respond very well to transactional opportunities, while holding serve on program contract business. And I would kick it over to Mike and Kevin for additional color.

Kevin Richardson

Hi, Brett. It's Kevin Richardson. The only thing I would add to that is on the transactional side that Eddie speaks to we've done a lot of work over the last couple years of looking at the inventory, and making sure that we've got the inventory in the right place because that's a 24 hour service model in terms of what our customers are looking for. And then a lot of work in terms of just internal, how do we get things as quickly as we can from the time the phone rings to the logistics to the processing. And so it's really driven around all the analytics in the inventory place that we worked on.

Brett Levy

Thanks again and congrats on the cubs.

Operator

Great. Thank you. Next we will move to Phil Gibbs with KeyBanc Capital Markets. Please go ahead. Your line is open.

Phil Gibbs

Congratulations for the cubs but I want to clarify the CEO Eddie Lehner is from Youngstown, Ohio, so I'm providing a little bit of consolation sitting for my seat in Downtown Cleveland this morning.

Edward Lehner

Phil, we commiserate together I'm a lifelong, Indians fan, but I am happy for the Cubs.

Phil Gibbs

Great, series.

Edward Lehner

Couldn't be better. Well, I could have been, but it was pretty good.

Phil Gibbs

Follows epic series. Congratulations all around. Anyways, to metals now, shifting gears, so October, November call daily demand momentum versus September of this year. Have we seen any pickup in apparent demand activity or pull from your customers, relative to those months?

Edward Lehner

Still early, Phil. What I would say, is it's level and then, you're going to get into the holidays where you're going to start to see that seasonal holiday step down. Right now, what we're seeing are level demand trends moving from Q3 to Q4 and really the big drop having taken place between Q2 and Q3.

Phil Gibbs

Then a question on the inventories, I think, your comments align well with Kloeckner's, they were saying this morning that they plan to reduce their inventories in the U.S. by 5% in the fourth quarter. And I think Erich you said you're taking them down a bit, if steel pricing is call it leveling to improving because of this cost push and decent supply-side dynamics in the U.S. Why do you think people are still pruning or want to prune inventories into the end of the year if that might be a decent value in terms of inventory value?

Erich Schnaufer

Yes. Lourenco Goncalves who I think is really smart and I have a lot of respect for him. He referenced service center inventories as being tight and getting tighter and that might be shortsighted on the side of service centers. But what I would say in my rebuttal to that is inventories are just aligning demand. If you look at MSCI inventories back in late 2013, they got down to 1.8 months, 1.9 months, even at 2.3 months, 2.4 months right now adjusting to lower levels of demand inventories wouldn't seem to be so tight.

Now the other point I would make is that there's still a lot of inventory in the channel and I think that's something that's overlooked and that is even if lead times go out, if we take recent data points from the various mills, where lead times have gone from virtually nothing in September to maybe three weeks or four weeks now on garden-variety HRC, there's still a lot of inventory particularly carbon in the channel.

So you can buyout and you get access to inventory as you reposition inventories in Q4 and then you can make a decision about Q1 and still have time to do that during the pretty slow period in December and the first half of January. So I think there's time to form an opinion. There is time to form a position around inventory. And there is enough inventory in the channel right now, relative to demand that nobody has to act as if they have a gun to their head. So I think it's a good time to position smartly. And there is a case to be made that prices will go up, mostly based on global cues, but prices will go up and firm.

What hasn't been discussed, a lot of it, is that aluminum and stainless behave much better than the tempest, that is carbon. So going through Q4 and into Q1, you can make a case that Q1 could be much stronger on the price side, and there should be a seasonal pickup in demand which would which would bode well for the industry. But I don't think anybody has to act in any kind of hyper fashion when it comes to putting the inventory position together in Q4.

Phil Gibbs

You talked a lot about underinvestment in your prepared remarks and I've heard you talk about this before, so it's pretty consistent with that. But what are you internally or from a high level anticipating in terms of demand momentum in 2017 versus 2016 or what kind of range are you guys preparing for?

Edward Lehner

I'm going to kick it over to Mike and Kevin. I'll say this Phil, the early intel that we're getting from a pretty wide cross-section of our customers is flat demand, which seems to be a pretty safe place to land. So we're getting the intel that's speaks the flat demand.

I think that you really have to parse it between cyclical and secular. And I think on a secular basis I'm going to continue to make this case that we're underinvested in that that build continues to grow day by day by day. And I'll reference a recent article that Larry Summers was quoted in, where it's never been a better time to invest in modernization in the U.S. and growth.

I mean growth is on sale right now, modernization is on sale right now and we should act on that. That's the secular case. But if you ask me cyclically into 2017, we don't see the demand really gets worse.

So intel right now looks like demand is flat going into Q1 of 2017 and then you have to take it quarter by quarter, with the caveat that things seem to be improving globally overseas in China and Europe and we have to see how that momentum sustains. So I would ask Mike and Kevin to comment as well.

Kevin Richardson

Hi, Phil, it's Kev, the only exception I would take to Eddie's comments about flat would be ground transportation, rail and Class 8, in particular, is well published, looks to be down next year double-digit. But coming off extremely good levels in 2015. So you got to put it in perspective.

But 2016 was down and 2017 looks to be down again. And then I would say on the flipside of flat is oil and gas in the energy market. If you look at where the rig count bottomed in May, every week there's been a couple three rigs coming online. Now that's still coming from very low levels, but there seems to be more positive sentiment in the energy markets.

So we would expect the energy markets to be up, ground transportation to be down, and most of the other end markets to be relatively flat.

Phil Gibbs

You said rail Class 8 and...

Kevin Richardson

Well, Rail and Class 8 are the two big ones that we would participate in. And if you look at the information - for the Class 8 from act, which is the industry publication, it looks like 2016 is going to finish about down 30%, 25 or 30% on the build. And 2017, right now the current forecast is down 11%. Now Class 5 to Class 7 actually is up a little bit this year and projected to be up a little bit next year. And then in railcars kind of the same type of numbers is down to 20 plus percent and looks to be about the same next year as well.

Phil Gibbs

Okay. And then I've got a quick one. Just on more of your company specific efforts I noticed in your filing that your stainless momentum was - call it, above seasonal in terms of strength and then also year-to-date, it's been fairly strong in terms of your gains there, so any comments on what you are doing in the stainless market that could be contributing to the good volumes? Appreciate it. Thanks so much.

Edward Lehner

Yes, I am going to kick this over to Mike Burbach in a second, but I'd tell you that stainless the cornerstone of our strategy. We have a leading position in stainless in the metals distribution marketplace and I think we've applied really good focus in that area and I think we've applied tools in that area and spend in that area to really help support that franchise. And I d ask Mike to comment on that as well.

Mike Burbach

Thanks. Thanks Eddie and hi Phil. Eddie is right on with that so stainless obviously is a very core product for us and for the last few years, we've had a strong strategic focus to leverage that strength. And you put that in conjunction with the fact that a lot of the end markets that drive the stainless consumption in the country have been some of the better markets that we've seen this year relating to food and food processing and some of the consumer industries.

So you put together a product area that may be is fared - slightly better than some others this year, combined with the strengths we have and a lot of the good work that you've heard about so far growing transactionally and leveraging everything we have from capable processing centers to being able to get visibility out to all sectors of Ryerson to get product to customers faster, it's been a good story. And it's all about execution. And if we start thinking about 2017 is you start thinking, the sectors - the sectors are going to do what the sectors are going to do.

We have to look at this and say we've had some success like stainless and it's all built around the execution and control and what you can't control. So we're going to stay focused on that speed, focusing on the customer and just making sure we get the right inventory in the right place.

Erich Schnaufer

And so Phil let me - here's something that we've been thinking about inside of Ryerson that is if you look at the third quarter GDP print of 2.9% and you look at the recent PMI and we don't know how that's going to be revised yet. But if you just look at those two data points and we will see if it's a head fake or if it's a one-off or if it's something that's consistent and sustained.

What I would say is that metals usage and consumption does really not, it does not map according to those numbers. So if we're looking for some kind of thesis going into 2017, what I would say is, metals usage, metals intensity really isn't correlating to those numbers. So something s got to give.

And if you look at the various manufacturing indexes like the Richmond Index, the Dallas Index, the Empire Index, Chicago National Activity index, those indexes aren't supportive of maybe the larger numbers we've seen around PMI and GDP. So that's something to watch that we think could lend credence to some upside as we get into the 2017, but we'll see.

Phil Gibbs

Thanks for all of the thoughts guys.

Operator

Thank you. Meanwhile, we'll move to Martin Englert with Jefferies. Please go ahead. Your line is open.

Martin Englert

Hi. Good morning, everyone. You implied expectations of normal seasonal weakness in 4Q volumes, any early thoughts on the possible delta for FIFO gross margins? I know in recent years a number of times you've actually expanded these margins in a deflationary environment.

Edward Lehner

Yes. Martin what we're seeing right now would lead to stability around aluminum and stainless and so now what we're working through is some carbon compression that you would expect from going up 180 per ton and down 120, per ton, which we referenced in the script.

So you are going to have some carbon compression as you move through the quarter that's going to start to update and maybe even reverse by the time we get to the end of the quarter based on spot futures prices that have even picked up over the last couple weeks. Here CRU looks like, it bottomed and looks to be turning and you got global prices that are clearly coming up as met coal, for example, and other inputs have strengthened globally.

So we're going to see how late that takes place. So I would say margin expectation is flat to maybe slightly down as we get through the quarter, but we have to see what happens around positive emerging trends in aluminum and stainless, and how quickly carbon margin compression starts to reverse as we move through the quarter.

Martin Englert

Would that be flat to down holding today's spot prices steady through year end?

Edward Lehner

It's a reasonable assumption.

Martin Englert

Okay. And looking while the debt maturity profile significantly improved and net debt is declining, leverage is still relatively high. What are your thoughts around, I guess, another potential equity raise over the next year or so?

Edward Lehner

Martin, I wouldn't comment on that at this time. I think we had a successful equity raise. We had a successful high-yield bond refinancing and we're happy with those outcomes in 2016 and we're focused on free cash flow generation in 2017.

Martin Englert

Okay. And one last one here, I guess, thinking about the longer-term trends that you've been seeing with your FIFO gross margins and stepping up notably over the past year. Do you have any kind of range in mind that you think is a new normalized range?

Edward Lehner

Given all the volatility, I think you have to grade that on a curve to some extent, but what we said for several years now is we want to consistently get to and surpass that benchmark at 20% ex-LIFO and we'll keep moving on from there.

Martin Englert

Okay, excellent. Thank you.

Operator

[Operator Instructions] And we will take our next question from Jorge Beristain with Deutsche Bank. Please go ahead. Your line is open.

Jorge Beristain

Hi, guys. Good morning. Congrats or condolences on the World Series, however you want to look at it.

Edward Lehner

It would have been one heck of price you a -

Jorge Beristain

So I guess, just simple factual questions at this point, do you believe the $30 carbon price hike is sticking.

Edward Lehner

Yes.

Jorge Beristain

All right. When you answered the prior question and were commenting on Current Spot Prices, those are assuming the $30 price hike?

Erich Schnaufer

We're really just looking at the futures market and looking at the contango. But we think that $30 per ton increase is going to stick.

Jorge Beristain

All right. Any LIFO guide for 4Q?

Erich Schnaufer

At this point what we're probably going to say is going to be some LIFO expense, we are seeing some prices increasing. But the offset against lower cost of market is still very difficult to judge. So, overall probably expense, but we're still working on the ranges.

Jorge Beristain

Okay. And the Eddie, I really like your prepared remarks, you have a way with the words, A>: Thanks.

Jorge Beristain

And I think that you said you hit it on the head when you're saying the demand is the joker in the deck for probably the year ahead or at least year-to-date, so can you just comment on how we should think about the service center market in the context of - you guys are flagging MSCI down sharply, but both you and other public companies seem to be taking share, so it would seem like your competitors are kind of getting it from both ends they are losing volume, but at the same time they're dealing with this crazy volatility in HRC.

So, can you comment as to, is that driving some of your competitors out of the business, is that creating issues with lines of credit, is that creating further consolidation opportunities for the big public players?

Edward Lehner

So, let me take those one at a time and I'll ask Mike and Kevin to supplement. Jorge. So, there is no question that we've seen stress and distress around segments. So if you take plate fabrication as an example, the plate market has really been walloped and so you've seen plate fabricators really struggle particularly smaller ones.

You think people suffer from this working capital whiplash that we've referenced where you're having such volatile swings going through periods and margins compression while that interval of time is deflationarily biased.

So that's causing stress in the industry, you've seen big players really economize on their footprints and pull-in their footprint in terms of service centers and territories that they would serve maybe on a daily basis or two times a week or three times a week basis, now it's may be a weekly basis or not at all.

So because of the downdraft and maybe that's even a kind term maybe we could say cliff Dodd since 2014. It's finally having those effects that you would expect in an industry, but what I would say is that spring conversely starts to - that spring start more tightly, and so there's a lot of upside operating leverage that's building in the industry as that supply chain tensions, and I think that's the quid pro quo that's the offset.

We don't like instant karma. But I - do think that the global cues right now on the supply side bode well for the pricing environment going into 2017 and it would be and I - it's hard to imagine although we've all been surprised before but it's hard to imagine that demand gets much worse from here?

And so we will take pricing first and see stabilization there and some growth in average selling prices based on input cost going up and prices starting to rise and demand really is the joker but I do think referencing my comments earlier in the Q&A we are going to find out in terms of truth telling whether broader economic gauges such as DEP and PMI both here and abroad start to pull demand forward into - into the marketplace in a way that's real and tangible. And I would kick it over to Mike and Kevin for some additional color.

Mike Burbach

Hi, Jorge this is Mike Burbach, say building upon what Eddie added you look at some of the results we've had and success we've had gaining share year over the last few years. It really comes back to there could be things going on at our competitors. But we're focused on what we can control and so much of what we've done the last few years is built around speed and - in providing a better experience for our customers.

So when you look at the interconnected network we've got the work we've done managing our inventories, putting the inventories in the right places, and in the resulting transactional growth we've been able to achieve from it. I look at that and I think we're just really well positioned relative to what's happening in this marketplace. And our goal is to just keep striving to provide a better solution to our customers and which should lead to additional share growth.

Kevin Richardson

Hi Jorge, Kevin Richardson just a directional comment in terms of stress in the supply chain and the shift of market share because if every public company is reporting a gain in share that obviously implies that the non-public companies - are not gaining share although that's - not a fair statement across the board.

But what we do see is we do see some small undercapitalized players. Looking for lifelines and in the M&A pipeline is very active right now. I think in this industry from a reverse standpoint of small companies that are struggling reaching out to - to try to get bought in and there's a fair number that have been out there that the performance has not been great and it would be a turnaround type deal. But there's no doubt that there's stress within the channels.

Jorge Beristain

Great. And if I could just get one more in. and can you comment about buying activity, it would seem that in the third quarter the excuse was well you know the second quarter price hikes were so shocking that perhaps people sat - on their hands now we're seeing into the fourth quarter seasonality, and I've heard a lot of election issues being blamed for people sitting on their hands. Can you comment as to whether you think that this is just like an atypically more than seasonal quarter because of some election issues and we could see some spring back in 1Q or maybe 2Q when there is clarity?

Edward Lehner

Yes. So, I've always maintained that when people have business, they buy. Now the real question is did they take a position, did they take a forward position. And I think we can answer affirmatively that backlogs and a line of sight in terms of demand is - the line of sight is short and demand is weak and so people buy to their backlogs.

And then the other question that that you're asking is, could other factors be limiting people's risk tolerance for taking positions on inventory, as you think about a short position versus a neutral position versus a long position. And I would say that, certainly all those factors could impact a view of staying neutral or short. Jorge, But here's the bigger issue. Okay?

The bigger issue is when you really step back from all the short-term indicators you still exist in a world with surplus capacities and basic materials and industrial metals and so as long as you can get that material within a serviceable window for your customers and there is a lot of places where you can go to get it, do you really have to take a long position unless the backlogs at your customers really start to go out. And then you're really building your inventory position to coincide with lead-times, plus a delivery time buffer plus the transportation piece.

So we've always maintained that when you want to look at inventory position look at mill lead-times for the product that you're buying, put some delivery buffer based on whether they deliver on time or not and then add seven days for transportation and receiving into your facility. So demand isn't strong enough right now to really, I think, move somebody from a short to neutral position right now.

And so some of those other factors, though could be impacting people's view as to whether they import more, or whether they are more aggressive in going beyond a neutral position, but in Q4 and moving from Q3, I don't think there is a really strong case to be made for moving from a short to neutral position.

Jorge Beristain

Got it. Thanks very much.

Operator

Great. Thank you. Next we'll move to Martin Englert with Jefferies. Please go ahead. Your line is open.

Martin Englert

I just had a quick follow-up on the transactional business growth. Do you have any idea of roughly what that accounts for, for your overall business this year compared to last year?

Edward Lehner

I would say that we've grown transactionally and we've grown in program contract. when We look at our shipments relative to the industry. But I would tell you that on a relative basis, Martin that transactional growth has probably been in the range of 200 basis points to 300 basis points when you look at our mix between transactional and program contract and I would ask Mike and Kevin to supplement that response.

Erich Schnaufer

Yes, Martin I think this is an area that we have had some success and - transactional as a percent of our overall business tends to be in the low 50s percent of our business. But this year it's ticked up slightly just - due to the fact that we have had more success there.

Martin Englert

And in general, how does the margin profile on the transactional compared to the program business?

Erich Schnaufer

Still higher. Still higher and in the range that we've referenced in past presentations. Transactional business tends to be anywhere from 500 basis to 700 basis points higher than program contract and the offset to that is cost to serve tends to be a little bit higher on transactional. But certainly the margin is higher so that 500 basis points and 700 basis points I referenced.

Martin Englert

And looking out into next year, any early expectations on - any shift there I guess between the transactional and the program or do you think it would kind of stay a bit elevated on par with this year?

Edward Lehner

Martin hard to say. I will go back and reference our organic initiatives and really the muscle and the tools and the intelligence that we are putting behind those efforts, I think we're going to continue to reap rewards in the marketplace for whatever demand environment we encounter.

Martin Englert

Thank you very much.

Operator

Thank you. Next we will move to Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Phil Gibbs

Hi, thanks very much. Eddie, you said that construction was weaker in the third quarter. I would imagine largely non-residential construction from your advantage point, which pretty much came through on our survey work. In August, we picked - that up. Has there been any snapback in the construction related commentary from your customer base versus where we were in the third quarter, just like the rest of the businesses too early?

Edward Lehner

Phil it's too early to say. I' mean just getting to October and getting in to early November, but that construction downdraft if you look at it. In July, August and September that cumulative decline was 1.2%. And I think it's pretty it was like 0.4%, 0.5%, and 0.3% through the quarter. And so that was a surprise because everybody anticipated the construction would actually be up in Q3, and you had three straight months of contraction.

So - I think we need to get our eyes fixed on early 2017 and see how that construction spend looks as we move through the year. But certainly that 1.2% contraction of the third quarter was a strong catalyst for what the industry saw in terms of demand.

Phil Gibbs

Thanks.

Operator

Thank you. Next we'll move to David Olkovetsky with CQS. Please go ahead. Your line is open.

David Olkovetsky

Good morning, guys. Good. Thanks. A couple of questions, so first I wanted to just talk quickly on imports I think you guys historically have been anywhere from 5% to 20% import oriented. I just wanted to get a sense where that is now?

Erich Schnaufer

Sure. So right now on a volume basis right we're right at about 10% on a dollar basis We're right around the 15% We're right within our range. But was more important in that answer is the break down so on the nonferrous side on aluminum and stainless that's probably 70% of that import number around common alloys and niche products.

Carbon's really only 2% to 3% right now and there is no real compelling reason, in our view to import carbon right now, you could probably find some opportunities in cold rolling galv if you could find them at scale - we will have to see how the circumvention case plays out. So no real compelling reason to import carbon at present. And we don't do a lot of it anyhow.

David Olkovetsky

All right. I mean you just stole my next two questions. But I was just going to ask is the - I mean there is basically no ARB left in hot-rolled obviously or plate, okay. And it sounds like you are saying there is still little bit of an ARB maybe in value add cold-rolled galv that kind of thing.

Erich Schnaufer

If you can find it.

David Olkovetsky

If you can find it, exactly. Okay. And then maybe just talk a little bit you mentioned that there is a still a lot of tons of flat rolled available I mean, are you referring to availability in Houston and the various other reports or where is that availability?

Edward Lehner

So whether its deposit's depots or whether it's - whether it's mass distributors or just keep on the channel where you can identify inventory as being available it s out there. And in some cases you may have to buyout, but in the fourth quarter coming off of Q3, as inventories have declined, when prices come down, inventory really gets into the channels, because people are trying to mitigate margin compression and inventory devaluation.

So, right now, there's plenty of availability materially with leads times going out. If there is going to be any risk at all in terms of the tightening and maybe some people getting caught a little bit short, it's going to be from the middle of Q1 through the end of Q2.

If you really positioned yourself incredibly short and can't access those channel inventories and the lead times go out significantly and trade case rulings continue to be affirmative that could create a climate from the middle of Q1 to the end of Q2 where you might get caught short of material a little bit.

David Olkovetsky

Okay. Great. And then can you just give us your quick thoughts on Vietnam I think, preliminary rulings to come in a couple of days?

Edward Lehner

David, that's a tough one. That's a toss. I really don't know how that's going to go. I mean there is a case that President says that it's truly a differentiated product. I also think the counterclaim to that and the counter case to that is strong as well. So I really don't know how that's going to get decided, really don't.

David Olkovetsky

How about offerings from Vietnam Are they being diverted elsewhere or what's happening on that front?

Edward Lehner

Absent Anything that was already on the water and transit, all of our Intel tells us that those offers have diminished.

David Olkovetsky

Wonderful. Thank you very much. Good luck in the fourth quarter.

Operator

Thank you. Next we'll move to Aldo Mazzaferro with Macquarie. Please go ahead, your line is open.

Aldo Mazzaferro

Hi, good morning. I missed a little of the call in the beginning, but I have kind of a general question, not specifically for yourself. But, given the way the market is with volumes pretty slow, prices seem to be down, but maybe stabilizing and balance sheets for the public companies anyway have gotten better in general. I'm just thinking this seems to me like a pretty good climate for some acquisitions or M&A I'm just wondering like I said, you may have answered this already I may have missed it, but are you seeing any kind of a feeling in the market that there is more availability for a deal?

Edward Lehner

In terms of larger deals, Aldo?

Aldo Mazzaferro

Yes. I think like not specifically yourself, but in terms of larger deals. Yes I mean there aren't that many I know out there, but there are some. And I'm wondering whether you see this as a time where some of those big assets maybe ready to move.

Edward Lehner

We maybe outside of earshot in terms of the confessional box, but we haven't really detected a lot around big deals in terms of conversation around big deals, I think there is a lot of reasons for that most notably of equity valuations, or you could argue that valuations are still not where you might want to see them in terms of bigger M&A taking place. But we really --in terms of conversation, frequency, intensity number of, it really hasn't been there. Most of the activity is within that bolt-on acquisition funnel.

Aldo Mazzaferro

Okay.

Edward Lehner

And there is a good amount of that.

Aldo Mazzaferro

Yes. In your experience would it turn more likely to be an M&A environment if the market improved or you think it will be more likely if the market weakened from here.

Edward Lehner

I think it would be more - I think market improvement would be better catalyst for those discussions taking place than a shift to the downside.

Aldo Mazzaferro

All right. Well, thanks, Eddie.

Operator

Thank you. And it appears we have no further questions at this time. I'll turn the call back over for any closing comments or remarks.

Edward Lehner

Thank you. Ryerson continues to generate strong internal momentum despite external macroeconomic headwinds to capitalize on a return to long-term secular industrial growth. We look forward to talking with you again next quarter, and appreciate your support and interest in Ryerson.

Operator

Thank you. This does conclude today's conference. You may disconnect at any time and have a great day.