Executive Summary / Key Takeaways

• Ryerson is completing a record $650 million investment cycle to modernize its network and shift from a contract-heavy model to a more profitable transactional business, positioning for margin expansion when industrial demand recovers from a three-year downturn.
• The announced Olympic Steel (OMCL) merger creates a combined $6.5 billion revenue entity, the second-largest North American metals service center, with $120 million in synergies that could accelerate the transformation and improve free cash flow generation in a depressed market.
• Financial performance reflects the investment phase: gross margins compressed to 17.98% amid falling commodity prices and restructuring costs, but transactional tons grew 46,000 while contract tons fell 50,000, demonstrating market share gains in the targeted spot business.
• The combined company will be overweight in high-value stainless and aluminum (48-49% of mix) versus the broader market, but underweight in carbon steel where Olympic brings complementary scale, creating cross-selling opportunities across 40,000+ active accounts.
• Key risks center on integration execution during a protracted downturn, with leverage at 3.7x EBITDA (above the 0.5-2.0x target) and the need to realize synergies while managing working capital in a still-contracting industrial environment.

Setting the Scene: A 183-Year-Old Company Reinvents Itself in a Downturn

Ryerson Holding Corporation, founded in Chicago, Illinois in 1842, has spent nearly two centuries building a metals distribution franchise that today spans the U.S., Canada, Mexico, and China. The company operates as a value-added processor and distributor of industrial metals, purchasing bulk quantities of carbon steel, stainless steel, aluminum, and other metals from primary producers, then processing and selling them in smaller quantities to manufacturing customers. This business model places Ryerson at the heart of industrial production, making it a cyclical bellwether for manufacturing activity.

The current investment case revolves around a deliberate transformation that began in 2021, when management initiated what it calls a "record CapEx cycle" that will exceed $650 million by 2025. This investment addresses a "legacy investment deficit" and aims to renovate the operating model to generate higher and less volatile earnings through future cycles. The transformation includes modernizing facilities like the Shelbyville, Kentucky non-ferrous coil processing center, establishing a state-of-the-art location in University Park, Illinois, enhancing digital commerce through ryerson.com 3.0, and converting approximately 40% of revenue to a uniform SAP ERP environment—a process management described as "really, really hard" but essential for long-term consistency.

This modernization coincided with what management characterizes as a "protracted industry downturn" and "third year of contractionary conditions." The Institute for Supply Management's PMI has shown contraction in 33 of the past 36 months, while Metal Service Center Institute data indicates North American service center volumes decreased 2.5% year-to-date through September 2025. Ryerson's revenue for the nine-month period fell from $3.59 billion to $3.47 billion due to lower commodity prices, though third quarter revenue of $1.16 billion represented a 3% increase from the prior year, supported by tariff policy and rising input prices despite persistently soft demand.

Technology, Products, and Strategic Differentiation: The Shift to Transactional Excellence

Ryerson's competitive moat rests on its processing capabilities and network density. The company carries approximately 75,000 products and processes nearly 80% of the metals it sells using techniques like cutting, bending, welding, and finishing to meet specific customer orders. This value-added processing transforms commodity metals into differentiated solutions, supporting pricing power in a fragmented market.

The strategic pivot toward transactional business represents the core of the transformation. As of the second quarter of 2025, Ryerson's mix stood at 46% transactional and 54% contractual on a ship-and-in-book basis, up from 43% at the end of 2024. Management aims to reach approximately 60% transactional over time, driven by investments that shorten lead times, improve service levels, and increase on-time delivery. This shift matters because transactional business typically carries higher margins and faster price realization than contract business, where price adjustments lag commodity movements.

The SAP conversion exemplifies the operational foundation required for this shift. Converting 40% of revenue to a uniform ERP environment disrupts operations in the short term but creates a "single source of truth" that enables consistent quoting, inventory management, and customer experience across the network. Management notes that service centers converted to SAP are "becoming fluent" and "knowledgeable," with bill-of-materials mapping improving and service levels normalizing. This technological backbone supports the transactional strategy by providing real-time inventory visibility and rapid quoting capabilities that win spot business.

Digital investments complement the ERP transformation. Ryerson.com 3.0, launched in the second half of 2024, creates an "endless aisle" of products with value-added processing options. Unique transactional customer visits are increasing, particularly among new customers establishing login credentials. This digital channel reduces sales costs and improves reach, particularly for smaller customers who value self-service capabilities.

Physical automation reinforces the strategy. The Shelbyville facility, at approximately 67% of its volume ramp-up target, processes heavier coils more efficiently, reducing costs and improving service times. The University Park facility, which replaced the antiquated Kedzie location near Chicago Midway, is on a "nice glide path" with bookings up 20% from their bottom and equipment "working beautifully." These investments create the capacity and consistency needed to capture transactional market share.

The Olympic merger brings additional technological and product synergies. Olympic has invested in its "Big 5" projects over the past 1.5-2 years, including a new cut-to-length line in Minneapolis targeting carbon growth, a white metals line in Chicago, a high-speed stainless slitter at Berlin Metals, a massive automation project in Chambersburg, Pennsylvania, and Action Stainless expansion in Houston. These investments, poised for returns in the 2026-2028 timeframe, align perfectly with Ryerson's modernization timeline, creating a combined asset base that requires minimal incremental capital.

Financial Performance: Margin Compression Amid Market Share Gains

Ryerson's financial results reflect the pain of transformation in a downturn. For the nine months ended September 30, 2025, revenue decreased 3.5% year-over-year to $3.47 billion as average selling prices fell across carbon and stainless product lines, partially offset by increases in aluminum. Gross profit decreased due to contracting industrial manufacturing demand and its effect on metals prices, with gross margin compressing 70 basis points in the third quarter to 17.2% (18.3% excluding LIFO). The company reported a net loss of $14.8 million in Q3 and $17.8 million for the nine-month period, compared to a $1.7 million loss in the prior-year period.

The cost structure shows both discipline and pressure. Warehousing, delivery, selling, general, and administrative expenses increased $3.6 million in Q3 2025 versus Q3 2024 due to higher delivery expenses, salaries, and incentive compensation. However, for the nine-month period, WDSG&A decreased $6.5 million, or $11 million excluding a Q3 2024 acquisition, primarily due to lower reorganization costs from the University Park facility and ERP conversion activities, plus Employee Retention Credit refunds in Q2 2025. A cost reduction plan initiated in Q1 2024 achieved $60 million in annualized operating expense reductions, demonstrating management's "self-help" focus.

The balance sheet reflects the investment cycle's impact. Total debt increased to $499.7 million at September 30, 2025, from $467.4 million at year-end 2024, with the debt-to-capitalization ratio rising to 39% from 36%. Net debt stands at $470 million, producing a leverage ratio of 3.7x trailing twelve-month adjusted EBITDA excluding LIFO—well above the company's 0.5-2.0x target range. Management expects the leverage ratio to improve as earnings increase and working capital releases in the fourth quarter, typically generating $70-80 million of cash.

Liquidity remains adequate at $521 million, comprising cash and availability under the Ryerson Credit Facility. The company expects to make $502 million in principal debt payments over the next twelve months, including $2 million in foreign debt and $500 million for the credit facility due in 2027. Interest payments are estimated at $29 million over the next twelve months.

Working capital management shows discipline despite market headwinds. The cash conversion cycle increased to 68 days in Q3 from 66 days in Q2, driven by higher-value inventory adding two days of supply while payables and receivable cycles remained consistent. Management maintains that Ryerson can finance incremental revenue at a ratio of approximately seven dollars of revenue per dollar of networking capital investment, a metric they consider a high standard relative to peers.

Outlook, Guidance, and Execution Risk

Management's guidance for the fourth quarter of 2025 reflects cautious optimism amid persistent challenges. The company expects volumes to soften 5-7% sequentially, aligning with typical seasonality as customers slow production around holidays and reflecting the view that demand challenges will persist through year-end. Revenue is projected in the $1.07-1.11 billion range, with average selling prices flat to 2% higher as tariff policy provides nominal support for commodity prices.

Gross margins are expected to remain under pressure in Q4 due to elevated input prices and the recessed demand environment. Adjusted EBITDA excluding LIFO is forecast at $33-37 million, with net loss per share of $0.28 to $0.22. LIFO expense is projected at $10-14 million, while net CapEx should finish the year within the $50 million target range—down significantly from the record investment cycle as the company focuses on operationalizing existing assets.

The Olympic merger provides the forward-looking strategic framework. Closing is targeted for the first quarter of 2026, with Ryerson shareholders owning 63% of the combined company and Olympic shareholders 37%. The $120 million synergy target is phased over two years, with approximately one-third realized by the end of the first year post-close and 100% by year two. Synergies derive from procurement scale ($14 per ton across 2.9 million tons of combined purchasing), operational efficiencies, and cross-selling opportunities across a more diverse product and end-market mix.

Post-close leverage is projected at approximately 3x, with deleveraging expected as synergies take hold. The combined entity will have over $6.5 billion in revenue and serve customers from more than 160 facilities, creating a denser network that improves speed to customer and service consistency. Management emphasizes that synergies are "real enduring synergies" based on current conditions, not dependent on market recovery.

The integration will require significant management attention and resources, potentially diverting focus from ongoing businesses. Olympic's end product manufacturing capabilities—representing 8% of its revenue mix—carry higher margins and returns than traditional distribution and are countercyclical, expanding margins when metal prices decline. This provides a natural hedge against the cyclicality of service center margins.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is integration failure in a depressed market. Combining two organizations while managing a "protracted industry downturn" creates execution risk that could delay synergy realization or generate unforeseen costs. Management acknowledges that integration will require significant management attention, potentially diverting focus from operationalizing Ryerson's recent investments.

Market cyclicality remains a fundamental challenge. The PMI has shown contraction in 33 of the past 36 months, and management describes conditions as "industry recessionary" with manufacturing activity "well below mid-cycle levels." If the downturn extends beyond the typical 4-6 quarter cycle to an "unprecedentedly long" duration, even realized synergies may not offset volume declines and margin pressure.

Debt leverage presents financial risk. At 3.7x EBITDA, Ryerson is well above its 0.5-2.0x target range. While management expects improvement through earnings growth and working capital release, any stumble in integration or market conditions could pressure liquidity. The company must manage $502 million in principal payments over the next twelve months while funding integration costs that could reach $40 million.

Customer concentration in cyclical sectors amplifies vulnerability. Ground transportation and agricultural equipment showed persistent weakness in Q3, while construction equipment and HVAC provided relative strength. A prolonged slowdown in key end markets could offset gains from the transactional shift and cross-selling initiatives.

Tariff policy introduces uncertainty. While current tariffs have placed "floors under bellwether industrial metal commodity prices," the U.S. government has repeatedly announced and retracted trade measures. This volatility creates planning challenges for customers and could disrupt supply chains, affecting both pricing and volume.

The transactional shift itself carries risk. While management has grown transactional tons by 46,000 year-over-year while contract tons fell 50,000, achieving the 60% target requires consistent execution on service metrics. Any degradation in on-time delivery or lead times could reverse these gains, as spot customers have low switching costs.

Valuation Context: Pricing a Transformation Story

At $25.20 per share, Ryerson trades at a market capitalization of $811.35 million and an enterprise value of $1.65 billion, representing approximately 0.36x trailing twelve-month revenue of $4.6 billion. This EV/Revenue multiple stands well below Reliance Steel (RS)'s 1.20x and Commercial Metals (CMC)'s 1.08x, reflecting Ryerson's lower profitability and scale. Olympic Steel trades at 0.40x revenue, suggesting the market values the combined entity's revenue potential modestly.

Profitability metrics remain challenged. Gross margin of 17.98% trails Reliance's 29.06% and Olympic's 24.40%, while the operating margin of 0.90% and negative return on equity of -2.66% reflect the investment cycle's impact. The enterprise value to EBITDA ratio of 27.29x appears elevated due to depressed EBITDA, making it less meaningful than revenue-based valuation.

Balance sheet strength is moderate. Debt-to-equity of 1.09x is higher than Reliance's 0.23x and Olympic's 0.49x, while the current ratio of 1.98x provides adequate liquidity. Net debt of $470 million represents 3.7x trailing EBITDA, above the target range but manageable if synergies materialize as projected.

The dividend yield of 3.10% with a payout ratio of 118.65% suggests the dividend is not currently covered by earnings, though management maintained the $0.1875 quarterly payment throughout 2025. Free cash flow of $105.3 million on a trailing basis provides better coverage, with price-to-free-cash-flow of 65.96x indicating the market is pricing in significant future improvement.

Valuation must consider the merger's transformative potential. If Ryerson achieves the $120 million synergy target, pro forma EBITDA could approach $200 million, implying a post-synergy EV/EBITDA multiple of approximately 8-9x—more reasonable for a cyclical industrial. The combined entity's denser network, improved product mix, and countercyclical end product manufacturing could support multiple expansion toward peer levels.

Conclusion: Execution at the Cyclical Bottom

Ryerson stands at the intersection of a completed transformation and a pending merger, positioning for inflection just as the industrial economy endures its third consecutive year of contraction. The $650 million investment cycle has modernized the network, converted critical systems to SAP, and enabled a strategic shift toward higher-margin transactional business that is already showing results—46,000 additional transactional tons despite a market downturn. The Olympic merger accelerates this trajectory, creating a $6.5 billion revenue leader with $120 million in synergies, complementary geographic footprints, and exposure to higher-margin end product manufacturing that hedges distribution cyclicality.

The central thesis hinges on whether management can execute integration while continuing to operationalize recent investments in a persistently weak market. Success requires achieving the 60% transactional mix target, realizing procurement and operational synergies, and managing debt leverage back toward the 0.5-2.0x range. Failure on any front could strain liquidity and delay margin recovery.

For investors, the critical variables are tangible: the pace of SAP normalization across the network, the trajectory of transactional market share gains, and the timeline for synergy realization. The stock's modest valuation relative to peers reflects execution risk, but also creates asymmetry—if the combined company delivers even half the projected synergies while maintaining its service center fundamentals, the earnings power could expand dramatically when industrial demand eventually recovers. The question is not whether Ryerson's transformation makes strategic sense, but whether the market will give management enough time to prove it.