Ryerson Holding's (RYI) CEO Eddie Lehner on Q4 2017 Results - Earnings Call Transcript

Ryerson Holding Corp. (NYSE:RYI) Q4 2017 Earnings Conference Call March 6, 2018 10:00 AM ET

Executives

Jeff Horwitz - Investor Relations

Eddie Lehner - President and Chief Executive Officer

Erich Schnaufer - Chief Financial Officer

Kevin Richardson - President of South-East Region

Mike Burbach - President, North-West Region

Analysts

Brett Levy - R. Seelaus & Comapny

Martin Englert - Jefferies

Chris Terry - Deutsche Bank

Tyler Kenyon - KeyBanc Capital Markets

Matthew Fields - Bank of America Merrill Lynch

Aldo Mazzaferro - Mazzaferro Research

Martin Englert - Jefferies

Operator

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Ryerson’s Fourth Quarter 2017 Earnings Webcast and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you.

I would now like to turn the call over to Mr. Jeff Horwitz with Ryerson Investor Relations, please go ahead.

Jeff Horwitz

Good morning. Thank you for joining Ryerson Holding Corporation’s 2017 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, 2017. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made, and are not guarantees of future performance.

In addition, our remarks today refer to several non-GAAP financial measures that are intended to supplement, but not substitute, for the most directly comparable GAAP measures. A reconciliation of the non-GAAP financial measures discussed on today’s call to the most directly comparable GAAP measures is provided in our fourth quarter 2017 earnings release filed on Form 8-K yesterday, which is available on the Investor Relations section of our Web site.

I’ll now turn the call over to Eddie.

Eddie Lehner

Thanks Jeff and thank you all for joining us this morning. I want to start the call by thanking our customers for their business which we never take for granted and my Ryerson colleagues for their many contributions in another year of progress for our company. Ryerson made notable advances in many areas of the business, while investing in organic growth initiative as well as acquisitions during 2017.

We grew revenue, market share and adjusted EBITDA, excluding LIFO, while generating expense leverage and improved working capital efficiency. In short, we advanced notably in key areas of our business except for the margin compression experienced in the second and third quarters of 2017. Ryerson's margin compression in the year can be attributed and summarized as follows; nickel and chrome volatility and deflation within the year, particularly through the second and third quarters had an outsized impact on our margins given Ryerson's relatively larger exposure to stainless as a percent of our sales mix than compared to our peers.

Additionally, the U.S. market experienced a large influx of aluminum common alloy sheet imports priced at levels well below the corresponding increase in the LME through the year. Further, there were wide spreads in prices between imported carbon plate cold rolled and galvanized sheet products compared to domestic products. Per the U.S. Commerce Department, apparent steel demand increased 6% while import penetration for steel mill products, excluding semi finished products, increased 1.3% to 26.8% in 2017 compared to 2016, a 12% year-over-year increase in imported tons as more metal purchasers move their supply chains offshore for skill procurement.

Finally, Ryerson's mix shifted to more sheet products from long and plate products, particularly aluminum and stainless sheets. Sheet products comprised two thirds of the metals market in North America according to the Metals and Service Center Institute or MSCI with plate and long products comprising one third of the metals market. Ryerson continued its strong support for its domestic mill suppliers throughout 2017 as we imported approximately 10% of our material compared to the industry average of 34%. We sacrificed some margin points in the short term, but made a better long-term choice for our customers and suppliers by further strengthening our domestic supplier relationships during 2017, which should support supply continuity and service levels to our customers in 2018 as the market works through supply and pricing dynamics following the White House announcement on steel and aluminum tariffs this past week.

The past nine years, we've seen Ryerson develop vastly improved tools, processes and systems for managing its business regardless of world trade and policy dynamics at our self-help determination and business model for providing great customer experiences continues to develop for the benefit of all stakeholders. Evidencing the continuing implementation of our strategic business model, we saw the addition of more processing capabilities to our integrated and intelligent service center network welcoming two value-added processes to the company with the acquisition of Laserflex and Guy Metals, as well as investments in analytics, omnichannel sales and automated materials handling systems. Ryerson continues to scale and advance our business model, centered on an intelligent network of interconnected service centers delivering customer solutions and great customer experiences.

Looking ahead to 2018, global supply and demand fundamentals appear stronger as tax reform, business investment, synchronized global growth, a lower U.S. dollar, U.S. trade policy actions, lower domestic import levels and China's supply side reforms are supporting stronger demand and pricing conditions in the U.S. Industrial metal commodity prices for CRU carbon coil and plate products and Midwest aluminum continue to trend higher in the first months of 2018 compared to the fourth quarter of 2017, and should land further support in stabilization to average industry selling prices. After a decrease from December 2017 to January 2018, the stainless 304 surcharge recovered in February and appears to be trending upwards as the London Metal exchange nickel price, which is a key component of the stainless products, continue to increase.

Additionally, it appears the chrome reset for the second quarter of 2018 will be higher as well. Demand remained positive for most of our key end markets compared to last year and Ryerson anticipates these conditions to continue for at least the first half of 2018. Given the supply and demand dynamics we currently observe, Ryerson expects further margin expansion in the first quarter of 2018 compared to the fourth quarter of 2017. Accompanying anticipated gross margin expansion in the quarter, we also note in our outlook the lengthening of no lead times, tight commercial trucking markets and operating expense inflation. We anticipate that these conditions and are working to mitigate their impacts as we move through the first quarter of 2018.

Ryerson is well positioned to realize the upside of a strong manufacturing economy provided one thing that has been missing the past nine years, and that is duration, duration and duration. It is important perspective to look back on the past nine years and realize that demand in the industry is still well below industry averages the past 25 years and commodity prices have just recovered to levels in place during 2014 whereby CRU carbon hot-rolled coil and Midwest aluminum prices are slightly higher in early 2018 than 2014 average prices and the stainless 304 surcharge price is still significantly lower.

It is easy to fall into the trap of headline instant karma. However, we have learned two hard knocks to not get comfortable as the policy retaining wall that is restraining massive overcapacity is still forming. The key going forward is to track very closely the duration and sustainability of these conditions, while ensuring availability service and quality to our customers.

With that, I'll turn the call over to Erich who will discuss in greater detail our 2017 financial performance.

Erich Schnaufer

Thanks, Eddie and good morning. Ryerson's revenue of $3.4 billion grew year-over-year in 2017 by $505 million or 17.7% with average selling prices 11.9% higher and tons sold up 5.1% compared to the prior year period. The company gained market share as Ryerson North American tons sold increased by 6.7% compared to North American industry volume growth of 3.8% according to the MSCI.

Net income attributable to Ryerson Holding Corporation was $17.1 million or $0.46 per diluted share in 2017 compared to $18.7 million or $0.54 per diluted share in 2016. Excluding benefits from income tax reform, restructuring and other charges, impairment charges on assets and losses on the retirement of debt, net income attributable to Ryerson holding Corporation was $13.8 million or $0.37 per diluted share in 2017 compared to $28 million or $0.81 per diluted share in 2016.

Adjusted EBITDA, excluding LIFO, increased 3.4% to $184.1 million in 2017 compared to $178 million in 2016. Gross margin decreased to 17.3% in 2017 compared to 20% in 2016. Included in cost of materials sold was net LIFO expense of $19.9 million in 2017 and LIFO income net of $6.6 million in 2016. Gross margin, excluding LIFO, decreased to 17.9% in 2017 compared with 19.7% in 2016. Gross margin compression in 2017 was driven by elevated import levels, pricing volatility and well supplied markets, which muted our pricing power even with higher mill procured and metal costs.

Warehousing delivery, selling, general and administrative expense increased by $36.1 million or 8.3% in 2017 compared to 2016 driven by higher variable costs as our ton sold increased with higher wages, benefit costs, ability expenses and delivery expense. Warehousing delivery, selling, general and administrative expenses as a percentage of sales declined the 14% in 2017 compared to 15.3% in 2016, demonstrating the company's ability to realize expense leverage with higher shift volumes even with elevated input costs.

Turning now to end markets, Ryerson increased shipments in 2017 compared to 2016 and nearly all end markets with the highest growth experienced in construction equipment, HVAC and oil and gas sectors. Ryerson saw encouraging signs from the oil and gas end market in 2017 as rig counts increased 130% compared to the trough levels in mid-2016. As well as promising signs in the construction equipment and HVAC end markets with construction spending nearing five-year highs according to the U.S. census bureau.

Only our consumer durable equipment end market experienced volume declines in 2017 compared to 2016, driven by weaker tons sold to automotive, home appliance and electronics sectors. Additionally, Ryerson noted shipment strength in the U.S. relative to Canada, Mexico and China when evaluating market share gains in 2017 year-over-year, and against industry benchmarks.

In the fourth quarter of 2017, revenues were $810.6 million, 18.8% higher than the year-ago period. The average selling price per ton increased 11.3% and tons shipped increased 6.8% from the fourth quarter of 2016. Net income attributable to Ryerson Holding Corporation was zero in the fourth quarter of 2017 compared to a net loss of $8.6 million or $0.23 per diluted share in the fourth quarter of 2016. The enactment of the Tax Cuts and Jobs Act or income tax reform in December 2017 resulted in a one-time income tax benefit of $3.4 million in the fourth quarter of 2017. Income tax reform primarily impacted the valuation of Ryerson's deferred tax assets and liabilities, as well as imposed a one-time transmission tax on foreign earnings.

Excluding benefits from income tax reform, restructuring and other charges, impairment charges on assets and losses on the retirement of debt, the net loss attributable to Ryerson Holding Corporation in the fourth quarter of 2017 was $3.4 million, $0.09 per diluted share compared to a loss of $7.1 million or $0.19 per diluted share in the fourth quarter of 2016. Adjusted EBITDA, excluding LIFO, was $40.6 million in the fourth quarter of 2017 higher than both third quarter of 2017 and fourth quarter of 2016 amounts of $37.7 million and $36 million respectively.

Gross margin was 16.8% for the fourth quarter of 2017 consistent with both the third quarter of 2017 and the fourth quarter of 2016. Included in cost of material sold was net LIFO expense of $8.1 million for the fourth quarter of 2017, net LIFO income of $1.7 million for the third quarter of 2017 and net LIFO expense of $13.8 million for the fourth quarter of 2016. Gross margin, excluding LIFO, increased to 17.8% for the fourth quarter of 2017 compared with 16.6% in the third quarter of 2017. Compared to the year ago period, gross margins excluding LIFO decreased by 100 basis points from 18.8%.

Turning now to working capital and liquidity. In 2017, Ryerson's inventory balance stood at 71 days of supply compared to 76 days in the year ago period. Ryerson's exceptional inventory management and use of analytics provided additional liquidity, helping enable investment in two value-added growth acquisition; the Laserflex Corporation, a metal fabricator specializing in laser cutting and welding services; and Guy Metals Inc., a processor and polisher of stainless steel products. We also made targeted investments in value-added processing equipment in several of our existing locations throughout the year. Additionally Ryerson reduced its pension liability in 2017, which decreased from $216 million in 2016 to $165 million in 2017, driven by higher returns on planned assets and lower benefits obligation.

As of December 31, 2017, borrowings were $384 million on our primary revolving credit facility with additional availability of $264 million. Including cash, marketable securities and availability from foreign sources, Ryerson's total liquidity was $338 million compared to $301 million in 2016. Cash used in operating activities was $2.1 million in 2017 even with our additional investment in working capital, with higher value inventory due to higher metal commodity prices and higher average selling prices. Ryerson generated $91 million from operating activities in the fourth quarter of 2017 as the company reduced its inventory investment consistent with normal seasonal demand in the period.

Ryerson generated cash of $25 million from operating activities in 2016 and $48 million from operating activities in the fourth quarter of 2016. In 2018, Ryerson continues to assess the impact of the income tax reform and currently expects its effective tax rate for the full year of 2018 to be in the range of 26% to 27%. The company expects to receive AMT credit refunds of $30 million in total with $15 million expected in 2019 and the remainder going forward.

Given the substantial changes to the Internal Revenue Code, the estimated financial impact for the fourth quarter and the full year 2017 are subject to further analysis, which could result in changes to these estimates in 2018.

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

Eddie Lehner

As one of the largest distributors of domestically produced products, we are well-positioned as supply gets tight and import supply chains get tested in terms of product availability, lead times and pricing, pending enactment of the section 232 tariffs announced by the president last week. Like our customers, we are navigating through some very different but not completely unfamiliar terrain.

We are committed to helping our customers understand the current dynamics as we execute on delivering an exceptional customer experience. Ryerson continues executing on its vision to build a competitive advantage across our intelligent network of interconnected service centers operating with speed, leveraging our scale, providing value-added processing and services, enhancing our customer service culture and using analytics to create great customer experiences as an iconic industrial brand 175+ years in the making.

Looking ahead, we will continue to further verbalize our costs, improve working capital efficiency, gain market share, expand margins and prudently allocate capital to further deleverage the balance sheet and grow the business.

With that, let's open the call for your question. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Brett Levy from R. Seelaus & Comapny. Your line is open.

Brett Levy

In terms of 232, it seems like there has been a little bit of backtracking on this. What you are hearing? What are you knowing? And it’s just I would love can view much closer to the situation than a lot of people. What are you hearing about the final result?

Eddie Lehner

Yes, I mean Brad we used a phrase in the script, instant corma and I think right now it's the headline. And there is a lot of action it's currently around that headline but nothing has been enacted yet. And so I'm going to have Kevin and Mike give you more color. But we've obviously had constant discussions since last Thursday. And what's happening is the spot market is really trying to see where pricing might consolidate going forward. I mean people are obviously concerned about availability, they are concerned about continuity. And what really -- it's really hard to extrapolate what's going to happen, because nothing has been enacted and the status quo is putting up a pretty forceful fight right now. So we just have to be nimble and quick and adjust as the story develops. But I'm going to ask Mike and Kevin comment on that as well.

Kevin Richardson

Obviously, it's a fluid situation with only of being five days old. But as Eddie mentioned, we are starting to see an impact on the spot market in terms of a reaction of the anticipations of something happening in tight supply and pricing going up. Most of the conversations we've had in the last few days have been from our OEM contract accounts and those conversations were more centered around continuity of supply to make sure that we had our supply chain set-up. And for the majority of our business in the contract market, it's almost all domestic supply chains. So right now we’re just weeding through the confusion and committing to communicating in real time as we get updates.

Mike Burbach

Just to add-on, this is three days old from when the announcement came out last Thursday. And you're right, there has been different comments and questions, more questions and answers. I guess the way we think about it right now is we're seeing close to customer keeping them informed with what we do now and when we know what's imprint. There is just nothing really else going on that we can share. But the main thing here is we have to double down and take care of our customers, make sure we’re doing what we've been doing to the years, which is providing service and products in times like this. And so I feel like whoever this thing plays out we’re going to be well positioned to benefit from it.

Brett Levy

So to the follow-up question actually doesn’t have to do with 232 or anything else like that. The perception that this is a business whether is still almost 50% of the market that is small, and I think that by the power of your marketing and your access to steel and aluminum and stainless producers, bar and beam producers and that sort of thing. The big guys just getting more power. At this point, as you choose to grow, is it build or buy, because I mean I actually feel like build may actually be make more sense. Just put up a service center somewhere where you think it makes sense and you may dominate some of the regional producers?

Eddie Lehner

So Brett, I’d answer it like this. M&A has got to be part of the strategy, but disciplined M&A is critical. And staying within your parameters of what you think a good acquisition is, how it's supported with the strategy and then seeing what comes through your funnel through active, really active participation in the M&A environment, we've done that. I think organically what's going on inside of our company is I think it's really exciting. Now, it takes time to build it, because there's an infrastructure, there's plumbing, there's change management, there's cultural aspects of this. But the organic growth part is developing.

Now, the key is we can put up service centers, we can look for places that would support organic growth. But I think the more critical question is what do you put in that service center. I mean if you’re just going to put in traditional equipment, traditional racks and very traditional material, that's okay, but what are you going to put in there that's different in terms of technology, automation, work methods, systems and processes that truly make that organic growth piece differentiated. And that's what we're doing with the existing network, service center-by-service center when we talk about an interconnected intelligent network of service centers that's what we're doing.

So I think the more important question to ask is what's going to go in that service center that's different. And if it’s just going to be more the same, there's plenty of general line capacities still in the market that's fighting for the lower value or the lower value business in this industry. I mean there is still a big fight going on for that business. Better question is what do you put in that service center to make that a real organic growth engine that can scale. And again, I would I would ask Mike and Kevin to comment on that as well.

Mike Burbach

Eddie, I think you hit it pretty much square in the head. As we think about growth, you think about what customers are looking for today and they're looking for speed, they're looking for quality, they're looking for someone that can provide value that helps them grow their business. And so within our existing footprint, we're continually striving to get better in all aspects of that. And if there are spots to grow in markets or geographies that we're not, we certainly look at that as well. But the real key right now is leveraging what we've started. We've come a long ways leveraging all the assets we have across the entire enterprise and we think there's a lot of upside yet to grow that business.

Mike Burbach

Brett, the only thing I would add in terms of the structure of the industry of 50% being the smaller players is, it will be interesting to see how the 232s play out in the long term of what that does to import supply chains, because I think a lot of the smaller players would be working off of master distributors and import product that's coming into the different ports. And so I think that that's a question in terms of just the overall structure of build versus buy as well.

Operator

Your next question comes from Martin Englert from Jefferies. Your line is open.

Martin Englert

So there is a lot happening on the policy front and you’ve already touched on 232 a bit. But I guess I'd be curious to know what your customers are telling you regarding internal growth CapEx for their businesses looking forward post tax reform?

Eddie Lehner

The feedback's been really positive. I think there's certainly incentives to make those investments that are better than what was in place really since the great recession for sure. So I think there's an enthusiasm and a willingness to make long-term capital investments in those businesses. And so the feedback I’ve been getting has been very positive. Mike and Kevin?

Kevin Richardson

I agree Martin. The only thing I would add to that is that I think there is a theme developing in terms of capital investments to try to automate, because labor markets are getting surprisingly tight as industrial America recovers. So even though it's still well below the average shipments from 10 year period, it’s still surprising how tight the labor markets are. So I think that there is good activity relative to capital investment for sure.

Mike Burbach

I agree with the automation piece, more and more conversations surrounding that considering the employment constraints that exist out there today. But I would say when you take the tax reforms, coupled on top of improving sentiment that started pre -- before the tax laws change, really has put a perfect storm together where activity levels and at least the attitudes from our customers in virtually every sector is more bullish today than it would have been 12 months ago.

Eddie Lehner

And Martin I would say that structurally there are things going on in our industry when you look at the demographics in our industry when you look at the fragmentation that Brett alluded to and a number of smaller service center companies, structurally speaking as labor gets tighter and as owners start to look for exits and they start to look to liquidity in their businesses for with respect to generational turnover, I think it’s going to create opportunities in our industry to invest. I think our industry is going to have to invest. I think our customers are going to have to invest in technology. And I think there is opportunities for people coming into the industry to have great careers, because we skipped a generation in a half effectively. And so you need to combine making investments in equipment and technology with recruiting a new generation of people to come into the industry. So there is a lot of structural things going on in combination with that inducement to invest that I think is going to create a good cycle of investment in the industry moving forward.

Martin Englert

So it sounds like more CapEx dollars towards automation and maybe it’ll push some of the fragment, more fragmented private businesses may be towards consolidation as well?

Eddie Lehner

Yes, they can if they can’t scale capabilities and if they can’t make those investments in newer capabilities, I think that will be a catalyst, yes.

Martin Englert

And touching on this a little bit and you’ve highlighted this in the prepared remarks, but on your SG&A you've remained fairly consistent quarter-to-quarter running around maybe $105 million, excluding the DNA, looking into 1Q in 2018 given some of the inflationary factors. What would you be anticipating as far as SG&A run rate on a go forward basis?

Eddie Lehner

So we had good expense leverage in 2017 where our revenues obviously increased faster than our expenses. We do anticipate the same thing happening through 2018. I think our expense controls are good. We’re not going to be immune to OpEx cost pressures that have shown themselves in the industry in 2017 and that’s continued into 2018. But the key for us is to continue to look for non-value-added cost take those out and verbalize our cost structure, we’re making good progress in verbalizing that cost structure because then when, when the time comes and we hope it’s a long time from now, but when the time comes that the industry influx again, we can peel off those cost layers without a great degree of difficulty.

Martin Englert

And just thinking about it on another way is that I think those costs were around maybe $210 a ton on an adjusted basis in 2017. And assuming you see some leverage, the anticipation would be something lower than that net-net, right?

Eddie Lehner

Yes, net-net.

Martin Englert

And just coming back and taking a look at, in the release you did speak to improving demand as well as expectation for margin improvement quarter-on-quarter on the gross margins given the rapidly rising metals prices. Would you anticipate something in excess of 19% on a FIFO basis due to -- but then also taking the inflation what should we anticipate for a LIFO charge?

Erich Schnaufer

Yes, so taking a look at LIFO, we’re estimating right now somewhere around $10 million of LIFO expense in the first quarter. As far as where our margins are going to come out at on a FIFO basis, we see an improvement in our gross margins. However, it's still a little bit early to quantify, we’ll be coming out with some guidance for the first quarter later in the month of March.

Eddie Lehner

Martin, the key for us is to see how contract business is going to behave relative to transactional pricing were about 50-50. There is an obvious lag in contract pricing in the industry as it is for Ryerson. There has certainly been better margin expansion on the spot transactional side. And depending on where policy takes us that can be more or less as we move through the year. Let me do a quick retro spec because I think this brings the margin question into better focus and I think it illuminates it much better, because we certainly get the question around what our Ryerson’s intrinsic margins when you try to boil-up volatility as much as you can do that.

And so I went back and I did some work and I think you have to take a look at our margins over two year period. So you have to pair them up, because of the volatility that's occurred since 2008. So here is a perspective for the audience. So in 2008 and 2009, ex-LIFO, margins were 12%; in 2010 and 2010, they were 15%; in ’12 and ’13, they were 16.4%; in ’14 and ’15, they were 16.8%; and in ’16 and ’17, they were 18.8%. So effectively when you look at intrinsic margin improvement within Ryerson, margins have gone up by 660 basis points while the other thing that’s been happening, that other thing is average selling price deflation. So let's talk about that for a second.

Average prices in 2008 and 2009 on average were $18.75 a ton; in ’10 and ’11 they were $18.50 a ton; in ’12 and ’13, $17.85; in ’14 and ’15, $17.30; and in ’16-’17 that two year period, average selling price was $15.92. So you think about 660 basis point margin expansion in an environment of falling average selling prices, we like what's happened with our intrinsic margin profile and 20% the next stop for us. So when we look at where we make the next step in intrinsic margin improvement, it's getting to 20%.

Martin Englert

And that would have been FIFO gross margins. Correct?

Eddie Lehner

Correct, yes.

Martin Englert

One last one, if I could. Last year looking at the 4Q to 1Q, saw a double-digit gains on the volumes. Would you anticipate something similar to that something in excess of 10% 1Q '18 versus fourth quarter?

Eddie Lehner

Yes, so that's certainly a possible outcome.

Operator

Your next question comes from Chris Terry from Deutsche Bank. Your line is open.

Chris Terry

Just a couple from me. First for all just on 2018, I think you said the LIFO guidance was $10 million for 1Q. Just looking for some other financial guidance. What do expect on the pension payment side?

Erich Schnaufer

On the pension payment side, we're expecting about $28 million in 2018, that's up $6 million dollars from 2017, which was $22 million for our OPEB payments or retiree medical, that’s actually going to go down from $8 million to $7 million so that's a $1 million improvement. So we'll see about $35 million in total contributions to pension and OPEB.

Chris Terry

So you’d expect that to be the right going forward in outer years as well?

Erich Schnaufer

Well, that's the expectation in 2018 right now for 2019. We don't think there'll be a significant change, but it’s still little bit early to tell.

Chris Terry

And in terms of the overall market and again you touched on this in one of the earlier questions. But just specifically to downstream customers, when you're having the chats with them lost little bit since -- I guess since prices moved up this year but then particularly in the last few weeks with more discussion around section 232. Can you just talk a little bit about those customers or what they're thinking or how they're trying to run their business or what those conversations are about?

Kevin Richardson

Nothing really to add to what I said earlier, it’s just being five days into it it's just so new to try to absorb. The discussions have really been about how are we on the supply side, is there any risk in terms of continuity of supply. And I'm not trying to minimize price because obviously everyone's trying to digest what this means from a price standpoint. But right now it's just too early to tell. And we have been communicating in terms of the status of the 232, because they've been out there essentially for over a year in terms of the possibility. So there's been a lot of discussion. But we don't see anything in terms of an inflection on demand, it's more about people wanting to be able to plan and understand what it's going to do to their pricing in hopes that they can get it through the channel as well.

Eddie Lehner

And Chris, here's what I would say. The conversations that I've had, I think people are really looking to take care of the next quarter first. They're looking to take care of the near-term and ensure supply availability and continuity and then I think looking out after the next 90 days then they're thinking about our imports flow is going to be restored or not. So for people that have developed import models or I would say highly complementary import models to domestic sourcing for metal, they're starting to think say six months down the road after ensuring near-term availability and continuity, they are thinking are they just going to go ahead and import over the tariff, are the arbitrations going to be there between import and domestic to allow them to import over the tariff, is there going to be a tariff. And what availability are they going to have longer term. So I think there's a sequence developing where first and foremost people want availability and continuity and then they're starting to think about how is that going to be priced later on the year.

Operator

Your next question comes from Tyler Kenyon from KeyBanc Capital Markets. Your line is open.

Tyler Kenyon

Erich, any thoughts on just how we should be thinking about net working capital progression just as we move into the first quarter here?

Erich Schnaufer

So typically in the fourth quarter, that's our seasonally low period. We bring down accounts receivable and our inventory and that’s in line with the normal typical expected Q4 seasonal holidays. But going into the first quarter, we typically do have a seasonal than increase accounts receivable goes up, our inventory goes up. So I would expect to have a similar pattern in Q1 this year than we had in prior years. In addition to that, as metal commodity prices are increasing, there is going to be some continued inflation in metal pricing as well.

Tyler Kenyon

And then just doubling back on the pension, I appreciate the color just on the capital allocations there. But any thought as where [indiscernible] net credit or expense will move to in 2018 at this point?

Erich Schnaufer

We had net credit running through the P&L in 2017 of about $8 million. We think that the net credit in 2018 is going to be somewhere around $6 million, so a slight reduction in the credit.

Operator

[Operator Instructions] Your next question comes from Matthew Fields from Bank of America Merrill Lynch. Your line is open.

Matthew Fields

Just wanted to talk about something you’ve mentioned a few times now, which is continuity of supply. We've been reading a lot about some companies having shortage like California Steel I guess have some trouble getting slabs and potentially have to allocate tons in April. Are you able to get all the tons you need? And how are you seeing that market on the supply side?

Eddie Lehner

So Matthew, our supply chain has done a really good job. So I think our supply chain team has done really good job of keeping our inventory levels really, really well stocked across our network to keep our service levels high. I think our transportation team, our logistics team, has done a really good job getting that metal under load and out to our customers relative to current conditions in the industry, so certainly a tip of the cap to those teams. We are not experiencing shortages right now. We certainly are seeing lead times go out and the rest is anecdotal to us as it is to you. And I think those things are still emerging.

If you look at January’s import numbers, you would conclude that import are still pretty resilient. And so I think we’re really looking to see how those import numbers come down and how those shortages actually appear if and when they do. Right now, I think people are projecting that imports would bottom out sometime around May June in that timeframe and then everyone is taking a wait-and-see approach to it. But I'm sure Kevin and Mike have some color on that as well.

Kevin Richardson

Eddie, the only thing I would is one of the benefits of our scale is we’re major customer of just about every domestic mill in terms of having redundancy of supply. And then the other thing is with the 100 locations in the event that we were short of inventory in any given geography, we've got a network that we can move inventory and balance it out to fill those holes and then backfill. So we’re in a good position right now.

Mike Burbach

The only thing I would add is and Eddie touched on this is, our supply chain team has done a phenomenal job over the last few years. This has been the focus area for us to make sure we've got adequate inventories, but not too much. And with basis supply of 71 at the end of the year, which is right in the range that we wanted to be and its -- but what's behind the scenes is, our teams have analytics in place to look at our inventory down to the SKU and making sure we have the right inventory in the right place and leveraging the locations. So feel pretty good about where we are right now. Obviously, we have pay attention to the changing conditions and we’ll adopt as needed but right now, we’re in a good spot.

Eddie Lehner

Yes, I mean we're getting reports that depots are being cleaned out and people are buying ahead, maybe in excess of even their current demand right now. But that's got to materialize in the form of longer-lead times, it's got to materialize and I would say greater pricing pressure in that spot transactional market. So certainly, following that following that very, very closely everyday as you would imagine. But waiting for really more evidence in terms of been able to from conclusions from what we're hearing so far.

Matthew Fields

And then you mentioned imports and a strong January number I guess and maybe weaker of February license data, but maybe bought on May or June. What are you seeing for import delivery -- are people not taking delivery of imports, or walking away as the buyer of record, because they’re afraid of being swap with the tariff. I mean what are you seeing on that front?

Eddie Lehner

Yes, it’s all getting sorted out. It's really it's very cloudy right now. It's a mud puddle right now. But I think all that's getting sorted out. And we're hearing all kinds of things. And we can only relate it to back to what we're experiencing. And just given the way we structured our metal spend given our support for domestic suppliers, we were in a good position right now and I think that story is still playing out. And we've got to stay close to it to see how it in fact does play out.

Again, I think I mentioned this earlier in the call. We’re hearing that, folks are starting to think through strategies of at what level could they import over the tariff, at what time our traders going to come back into the market or our traders going to stay out of the market and who is taking the risk of any potential tariffs and duties. And so all those things are still getting sorted out because it's really fluid right now.

Matthew Fields

And then aside from the M&A and other objectives for your company, what do you think that you’re going to be investing into 2018 in terms of maybe getting your hands on the metal more. Is it what additional capabilities are you focused on this coming year?

Eddie Lehner

Yes. So value-add so in terms of processing capabilities that allow us to add more value of the metal, material handling automation. So wherever we can go ahead, because remember a core part of our DNA core part of our strategy is speed. So wherever we can augment, our people -- whenever and wherever we can further enable our people, we want to bring things like material handling technology, which really creates a safer work environment and a more productive work environment in conjunction with the abilities and the talents of our people.

So value-added capabilities, material handling technologies and certainly systems technologies, where we become much better users of information much better users of intelligence, much better users of analytics to really provide better customer experiences. So our digitalization roadmap continues to develop really nicely inside of Ryerson and we're getting really good feedback wherever we see those initiatives deployed, we get very good feedback from our customers as a result. So we'll keep investing in those areas as well.

Matthew Fields

So is it fair to say the focus on automation, digitalization and data rather than additional metal processing, this year?

Eddie Lehner

Not at the exclusion of, no. I would say it's well balanced because there are capabilities that we’ve got our eye on in terms of what we can further do metal to add value for customers. So I think it's well balanced.

Operator

Your next question comes from Aldo Mazzaferro from Mazzaferro Research. Your line is open.

Aldo Mazzaferro

I wanted to ask you a question about volatility. This year, the '17 started a lot like this '18 is starting out where you had first quarter the indexes on carbon pricing went up like almost a hundred dollars in the first quarter versus the fourth last year. You had a strong quarter. Your margin's gone up. But the second quarter even though your average selling prices continue to rise, the flattening in the market caused your gross margins to drop like 200 basis points in the second quarter versus the first. Are you doing anything this year to -- I know the market's stronger than it was second quarter. But are you doing anything this year to reduce volatility you think in that kind of an event that as a service center you're destined to be making good margins as the price is rising, but once it levels off you tend to get squeezed with the catch up on the cost of sales. And I just wonder what you can do to this day and age to mitigate that risk.

Eddie Lehner

So the way I would answer that is there's things that you do internally in the business, so structurally there's things we can do. Certainly, as we do more value add on as we add more capabilities and we pursue, we pursue more complex processing of metal that's one thing you can do to intrinsically improve your margin profile. The other thing is we talk about using analytics you get more margin for product when it's available in the right place at the right time. And so when we look at inventory analytics getting that product to the service centers in the right quantities at the right time so that you can fully quote a customer's request that's something that's also highly accretive to margins. So you work on those things.

I think in terms of trying to take volatility out of the supply chain, we have a risk management function, a department that we started four years ago. And they continue to develop and they continue to grow and do a really excellent job for us in helping us manage risk with our customers where we can take some of the volatility out of the supply chain. And so volatility has been a demon man, it has been and it’s been with us for a long-long time. And I think we continue to develop better, if not just coping mechanisms, but really tactics and really in fact strategies to help us mitigate that even get in front of it as time goes by.

Aldo Mazzaferro

I was wondering if you do things like selling futures at this point for example, would that be one of those tools that you consider.

Eddie Lehner

So from time-to-time, we have taken what we think are -- we've taken prudent hedges in respect of our physical inventory, but we want to be careful too because we're not a trading company. So I think where it makes sense we’ve gone ahead and risk managed parts of that inventory, and where we see opportunities to do that we’ll make those plays as they become available and as we think that a right thing to do. But we are seeing more interest from our customers and having those discussions around how do you manage risk and how do you manage volatility. And that’s not a value-added service that we feel good about providing to our customers and something that we really couldn't do effectively say for five years ago.

Aldo Mazzaferro

Eddie, on a separate topic, as you look at your company's gross profit margin ingeneral terms, it seems to be a step function below your big competitor. And I know there is some probably things that cause them to be a little higher because of totaling and things like that. But is there anything in your structure of the segments and the products and the geography that you have? Is there a standout area that might be something that could be addressed in terms of structurally improving your gross margins, say 200 to 300 basis points and then having a volatility essentially at a higher level?

Eddie Lehner

So the answer is yes. And I think there is two parts to that answer. One part is really expanding best practices as we develop them in one area of Ryerson and getting those best practices adopted throughout the company. There are areas in our company, for example, where we are much better in terms of transactional growth add expanded margins than some others of our company, and that's certainly going to happen when you heat map that out. And our goal really has to be to get that best practice proliferation out to the entire enterprise.

And so there are things we are doing there are things we can’t do. But I do think that as we compete more and more with information, I think as we compete more and more based on analytics and really focusing on the customer experience out, I can't stress that enough which is why I mentioned it in the script and I mention in every earnings release.

Our focus is on that customer experience. And even when we fall down, even when we don’t meet our own expectations for great customer experiences every single time, we learn from every one of those experiences in terms of what could we have done better and how can we do it better, because that’s really action is. If you can provide a great customer experience in terms of how you save that customer time, how you add value to the product and how you get to a consistent delivery profile and you can meet all their needs from picking ship as is all the way through value add, that’s where the action is.

And then I think on the contract side, you have to understand the contracts are still based on attributes. And so supply chain is obviously critical, price is critical but as you can offer those contract customers more attributes, you can develop a much closer relationship that can endure for many years as opposed to maybe six months to one year.

Aldo Mazzaferro

And what do you think about the stock price under $10?

Eddie Lehner

I think you could tell by my past purchasing history what I think.

Operator

Your next question comes from Martin Englert from Jefferies. Your line is open.

Martin Englert

I just had a couple of quick follow up questions, CapEx budget for 2018 and then maybe if you could provide a little color on year-on-year gains and aluminum products of the second half on the year has been pretty substantial. What product is that and what end markets are driving the growth?

Eddie Lehner

So for CapEx given that we have an incentive to invest in CapEx as well, our CapEx budget for this year, we’re going to be opportunistic. And I think I mean over the last several years we've been right in that $20 million to $30 million range, so that might step-up a little bit to say something between $25 million and $35 million. And that's based on us having a sufficient inducement to do that as well, so a small step-up in CapEx. And then with respect to aluminum growth in second half of the year, I want to kick that over to my partner, Kevin Richardson.

Kevin Richardson

The one standout end market in terms of what helped in aluminum was and in transportation in particularly class eight, market was very strong. And interestingly enough as the forecast for class eight is up another 27% in 2018 over 2017. So in general, the market share came from other end markets in general but class eight was a standout for sure?

Martin Englert

And then what products would have that been consuming?

Kevin Richardson

Flat role products, primarily at some place some long, but primarily with flat role.

Operator

At this time, we have no further questions in queue. I will turn the call back over to the presenters for closing remarks.

Eddie Lehner

Thank you for your continued support and interest in Ryerson. We look forward to talking with you again next quarter.

Operator

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