Ryerson Holding (RYI) Q3 2019 Earnings Call Transcript

Ryerson Holding (RYI 2.61%)
Q3 2019 Earnings Call
Oct 30, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, my name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to Ryerson third-quarter 2019 earnings webcast and conference call. [Operator instructions] Thank you. Ms.

Justine Carlson, you may begin your conference.

Justine Carlson -- Investor Relations

Good morning. Thank you for joining Ryerson Holding Corporation's third-quarter 2019 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, Mike Burbach and Jim Claussen, our 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, 2018. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the day 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, to 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 on our third-quarter 2019 earnings release filed on Form 8-K, which is available on the investor relations section. I'll now turn the call over to Eddie.

Eddie Lehner -- President and Chief Executive Officer

Thank you, Justine, and thank you all for joining us this morning. I want to thank our customers for the opportunity to earn your business, which we never take for granted. I also want to thank my Ryerson and Central Steel & Wire, or CS&W, teammates across our network for their efforts and continuing to make Ryerson a better organization as we move through this countercyclical deflationary cycle. In a few words, we are in the fifth consecutive quarter of declining CRU hot-rolled coil sheet or CRU prices.

We have now surpassed a delta of $400 per ton peak to current trough CRU HRC prices during the past 15 months. CRU HRC prices have declined 34% yea over year or $294 per ton. In fact, acute price deflation across all categories of carbon steel has been prevalent over the past five quarters exacerbated by ineffective attempts at mill price increases in the second and third quarters that increased and extended the magnitude and duration of margin pressure. Domestic prices have now approached levels, whereby domestic to international spreads favor domestic sourcing and scrap price declines appear to be abating with mill lead times stabilizing.

If we look objectively at year-over-year industry data, we find industry shipments contracted approximately 7% against relatively high inventory stocking levels. Consequently, the outfall of such factors is not surprising and resembles industry conditions experienced during 2015 and 2016, but of lesser magnitude so far. We highlight these points for several reasons. Despite the resulting gross margin compression, the impact is transient.

And beneath the surface, we're building more operating leverage in our business as we expect to inflect back to improving industry fundamentals, and Ryerson's financial and operating condition is much stronger than it was four years ago. Ryerson realized same-store industry market share growth, same-store expense leverage, net working capital management within our expectations, solid countercyclical cash flows, reduced leverage and increased net book value of equity in the quarter. Some quarters we grinded out, while our strategic investments in capex, acquisitions and our digitalization initiatives begin generating expected returns. Even when the clock runs out on the quarter, we continue advancing on the longer game at Ryerson as our operating model continues its demonstrated progress toward improved financial performance over the cycle.

Since the last industry counter cycle in 2015, Ryerson has increased its net book value of equity by approximately 282 million or approximately $7.43 per share. With respect to CS&W, we always understood this acquisition was going to be a heavy lift and shift turnaround, but also very worthwhile. CS&W has a strong industry brand with customer goodwill, but an operating model requiring modernization. At CS&W, with a product mix that is 85% carbon steel, industry conditions over the past five quarters, marked by acute carbon steel deflation, created significant transient margin compression.

As we expect, the average cost and inventory during the next several quarters, we also expect CS&W performance to recover meaningfully within a vastly improved long-term operating model. Turning to the current economic environment. CRU carbon hot rolled prices have declined to 2016 levels, down by more than 30% in October compared to the beginning of the year. LME aluminum prices have fallen to two-year lows and have come under further pressure due to weak demand and falling aluminum prices.

Stainless prices have received support from surging nickel prices, which rose more than 40% in the third quarter before giving back some gains over the past several weeks. From a demand perspective, the industrial environment softened in third quarter, with September U.S. industrial production decreasing for the first time since November of 2016. Weakened conditions were also observed in the September PMI reading of 47.8, which indicates manufacturing contraction.

North American service center tons shipped continue to contract in the third quarter of 2019 compared to the prior year, evidenced by a 6.6% decline in shipments as measured by the MSCI. At the same time, Ryerson's North American same-store tons shipped, excluding Central Steel & Wire, were up 0.5%, exhibiting better than industry performance and market share gains amid the aforementioned industry challenges. Turning more specifically to Ryerson's end markets. HVAC, commercial ground transportation and metal fabrication and machine shops were the strongest performing sectors with volume growth in the first nine months of 2019 on a same-store year-over-year basis, supported by nonresidential construction activity and class A truck sales.

Ryerson experienced lower shipments on a same-store basis in several end markets, most notably the oil and gas and food and agricultural equipment sectors as U.S. crude oil rig counts have steadily declined since the start of the year, and the agricultural industry has been negatively impacted by global trade frictions. Central Steel & Wire continues to progress toward post-acquisition goals, exceeding customer account retention expectations, achieving approximately 32 million in annualized expense take-outs and realizing 12 million in cumulative proceeds from real estate sales for operations that were consolidated into existing facilities. CS&W was acquired with significant working capital of nearly 140 days of supplied inventory, and management continues to target levels more in line with Ryerson's same-store service center metrics.

However, days of supply increased slightly at the end of the third quarter to 92 days compared to 91 days for the prior quarter due in part to shipment declines reflective of industry demand weakness. At the same time, the continuing industrial metal deflationary cycle, most notably in CRU hot-rolled coil price deflation, caused continued margin compression and inventory holding losses. As a result, CS&W generated an adjusted EBITDA, excluding LIFO loss, of 4.5 million in the third quarter compared to our expectation of adjusted EBITDA, excluding LIFO income, of 3 million for the period and compared to a loss of 2 million in the second quarter of 2019. As high-cost carbon inventories cycle out, margins reset and cost take-outs renovate the expense structure of CS&W.

Ryerson continues to view the company as having strong, commercial goodwill that is in the early innings of its turnaround potential. Management also continues to work toward its long-term mid-cycle target for CS&W of 600 million in revenue and 50 million in adjusted EBITDA, excluding LIFO, on an annual basis. For the fourth quarter of 2019, Ryerson anticipates revenues of 960 million to 1 billion, with tons shipped down 6 to 9% compared to the third quarter of 2019 due to normal seasonality patterns compounded by slowed U.S. industrial growth, projected declines in global economic growth and business investment uncertainty.

Carbon prices are expected to bottom in the fourth quarter and aluminum prices are expected to be neutral to modestly lower, while stainless prices, despite a recent pullback in nickel prices, are expected to remain supported by low warehouse and stock inventories, as reported by the London Metal Exchange, secular demand expectations in the electrical vehicle battery market and export restraints on Indonesian nickel ore. Collectively, Ryerson expects average selling prices in the fourth quarter to be down 3 to 5%. LIFO income in the fourth quarter is expected it to be in the range of 6 million to 10 million as inventory costs align more closely to replacement costs. Given these expectations, Ryerson anticipates margins to expand in the fourth quarter of 2019 as inventory costs more align to current market prices, and therefore, expects earnings per diluted share to be in the range of $0.08 to $0.18 per share and adjusted EBITDA, excluding LIFO, in the range of 36 million to 40 million.

Ryerson expects to continue to deleverage in the fourth quarter with the continuation of countercyclical cash flows utilized to further reduce long-term debt. With that, I'll turn the call over to Erich, who will discuss the highlights of our third quarter 2019 performance.

Erich Schnaufer -- Chief Financial Officer

Thanks, Eddie, and good morning. In the third quarter of 2019, Ryerson achieved revenues of $1.1 billion, a decrease of 11.6% compared to $1.25 billion in the third quarter of 2018, with average selling prices down 8.1% and tons shipped down 3.9%. Gross margin was 18.5% for the third quarter of 2019 compared to 17.6% in the second quarter of 2019 and 16.7% for the same quarter last year. Included in cost of materials sold during the third quarter of 2019 was LIFO income of $29.6 million compared to LIFO income of $12.9 million in the second quarter of 2019 and LIFO expense of $32.1 million in the third quarter of 2018.

Gross margin, excluding LIFO, was 15.8% in the third quarter of 2019 compared to 16.5% in the second quarter of 2019 and 19.2% in the third quarter of 2018. Margin compression during the third quarter was impacted by mark-to-market hedging losses of $4.9 million and inventory costs falling at a slower rate than average selling prices, most notably, at CS&W, which continues to work down its large inventory positions in carbon sheet products. Warehousing, delivery, selling, general and administrative expense decreased by $8.4 million or 4.8% in the third quarter of 2019 compared to the year-ago period. However, warehousing, delivery, selling, general and administrative expenses as a percentage of sales increased to 15% in the third quarter of 2019 compared to 13.9% in the third quarter of 2018 as revenue declines outpaced expense reductions.

Net income attributable to Ryerson Holding Corporation was $10.1 million, or $0.27 per diluted share in the third quarter of 2019 compared to $77.5 million or $2.06 per diluted share in the prior-year period. Adjusted net income attributable to Ryerson Holding Corporation, excluding gain on bargain purchase related to the CS&W acquisition, gain on insurance settlement, restructuring and other charges and income taxes, was $9.2 million for the third quarter of 2019 or $0.24 per diluted share compared to $6.3 million or $0.17 per diluted share in the prior-year period. Ryerson achieved adjusted EBITDA, excluding LIFO, of $29.5 million in the third quarter of 2019, a decrease of $21.2 million compared to the second quarter of 2019 and $59.2 million lower than the third quarter of 2018. Turning to year-to-date results.

Ryerson generated revenues of $3.54 billion, an increase of 9% compared to $3.25 billion for the same period last year, with tons shipped 8.8% higher and average selling prices relatively flat. On a same-store basis, Ryerson generated revenues of $3.08 billion, slightly up from prior year-to-date revenues of $3.07 billion, with average selling prices 2% higher, partially offset by a decrease in tons shipped of 1.6%. Warehousing, delivery, selling, general and administrative expenses increased by $50.5 million or 11.4%, an increase as a percentage of sales from 13.6% to 14% in the first nine months of 2019 compared to the same period last year. Notably, on a same-store basis.

Warehousing delivery selling general and administrative expenses decreased by $6.7 million or 1.6%, and decreased as a percentage of sales from 13.3% to 13.1% in the same period. Net income attributable to Ryerson Holding Corporation was $56 million or $1.48 per diluted share in the first nine months of 2019 compared to $105.4 million or $2.80 per diluted share for the same period in 2018. Adjusted net income attributable to Ryerson Holding Corporation, excluding gain on bargain purchase, restructuring and other charges, loss on retirement of debt and income taxes, was $56.3 million for the year-to-date period of 2019 or $1.49 per diluted share compared to $34.2 million or $0.91 per diluted share in the first nine months of 2018. Adjusted EBITDA, excluding LIFO, was $143.2 million in the first nine months of 2019 compared to $257.5 million in the first nine months of 2018.

At the end of the third quarter of 2019, Ryerson had 76.4 days of supply and inventory, or 74.2 days on a same-store basis, up from 73.6 days at the end of the third quarter of 2018. Our same-store inventory levels were within our target range of 70 to 75 days, while CS&W continues to work toward achieving acquisition post-closing inventory targets. We maintained ample liquidity throughout the quarter. As of September 30, 2019, borrowings were $441 million on our primary revolving credit facility with additional availability of $395 million.

Including cash, marketable securities and availability from foreign sources, Ryerson's total liquidity increased to $455 million as of September 30, 2019, compared to $441 million as of December 31, 2018. We generated cash from operating activities of $82.5 million for the third quarter of 2019 compared to cash used in operating activities of $44.5 million in the year-ago period, primarily driven by lower working capital requirements. We are pleased that Fitch Ratings assigned a first-time B+ rating to Ryerson with a stable outlook in recognition of our improved operating performance and disciplined balance sheet management. Ryerson continued to strengthen its balance sheet by utilizing the majority of our cash provided by operating activities to reduce debt outstanding by $77.1 million, while also investing $9.1 million in capital expenditures in the third quarter.

Compared to December 31, 2018, total debt decreased by $114.7 million and book value of equity has increased from $75.9 million to $141.1 million. Ryerson expects to continue generating significant cash from operating activities in the fourth quarter of 2019, given lower inventory replacement costs, coupled with our normal, seasonally lower working capital requirements. Now I'll turn the call back over to Eddie to conclude.

Eddie Lehner -- President and Chief Executive Officer

Thanks, Erich. While pricing and demand conditions certainly proved challenging in the third quarter, particularly, after July and August mill announced price increases failed to materialize, Ryerson has again proven adept at advancing our strategic initiatives while gaining market share and generating countercyclical free cash flow despite the current recessed market conditions. We expect to further reduce leverage and expenses as we move through year end, while improving operating leverage as we transition back to improving price and demand industry fundamentals longer-term and more structurally despite transient deflationary factors, our long-term value thesis continues its emergence around providing consistently exceptional value-added customer experiences, across a network of intelligently connected service centers at a local, regional, national and international scale. With that, let's open the call to your questions.

Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question come from the line of Martin Englert with Jefferies. Your line is open.

Martin Englert -- Jefferies -- Analyst

Hi. Good morning, everyone. Within the release ou talked about working through the higher costs inventory and then commented anticipated demand. Looking ahead through fourth quarter and 1Q '20, are you planning further reductions within within the inventories? Or rather do you expect some restock now if you're thinking carbon steel prices have bottomed?

Eddie Lehner -- President and Chief Executive Officer

I don't think we have to restock just yet. I mean, I think, we're getting to a point of neutrality. Martin, here's some news you can use though. We went back and we looked -- you know we've looked carefully at what we call duration of cyclical periods and countercyclical periods, and we're -- and you know we're in the fifth quarter now the countercyclical periodthe average duration of those countercyclical periods tend to be about eight quarters.

So we've got a couple more quarters to go probably of that counter cyclicality, all other things being equal based on the information we have available to us now. Our RCSS group did some really good analysis and 88% of the time over the last 10 years, the HRC price has been above $475. The CRU print today was $444. So probabilities are on the industry side that we're going to come out of this bottom, and we're going to see better pricing fundamentals going forward.

You know, if you look at the Bloomberg commodities sub index prices lead the industry down, demand follows and then at some point similar to 2015 and '16 prices inflect back up and demand should come back up with it. That's what the history would show.

Martin Englert -- Jefferies -- Analyst

So based on your commentary, it would seem that we're maybe in for some continued headwinds, maybe through first half of '20. If we have a couple more quarters to go here with some anticipation that maybe some pricing recovery at that point. Yeah I think mindful pricing recovery.

Eddie Lehner -- President and Chief Executive Officer

Yeah. And I think that just the tailing out effect of average cost getting to replacement costs and then seeing average cost move below replacement cost which is how that works. I mean, if you think about it, we had two head stakes this year that actually came at ironic times. But I mean at the time we had our Q1 call, with -- April, May, and you could see a flattening of the CRU numbers, and it looked like they might inflect up.

Back in July, August, if you remember, and I know you do, the mills announced pricing increases that turned out not to materialize. So during those two periods, in particular, prices leveled out and actually went higher, but they didn't stick. So I think, you know, I think it really matters. What matters is, when do you receive the inventory, right? So you're receiving stuff now that you bought four weeks ago, six weeks ago, eight weeks ago, depending on whether it's HRC, cold rolled or coated.

And so now you're getting that inventory in from one to two to three months ago. But looking forward, clearly, that replacement cost is going to be trending more aggressively down toward average and then moving below that.

Martin Englert -- Jefferies -- Analyst

Looking at -- there was more notable dip -- double-digit declines versus the prior year across both aluminum and stainless volumes. Can you touch on what you're seeing in those products and end markets? And maybe expectations over the near term into early 2020?

Eddie Lehner -- President and Chief Executive Officer

Yeah, sure. I mean I think it's just general softness that's been noted in machinery and equipment and some of the other end markets. But I'll let Mike and Kevin give you some more color on that.

Mike Burbach -- North American regional president

This is Mike Burbach. I think, Eddie's right. It's just more general softness than any one thing that you can put your finger on, but what we did see from an end market perspective is continued strength on a relative basis in commercial ground transportation, much of which attributed to class A trucks continued to be strong for us this year. And then when you look at the metal fabrication and sheet machine shop sector, you know, I look at that sector as an area that's highly transactional in nature and really reflective of Ryerson's ability to improve its business model, gain share, as we continue to invest in speed and responsiveness and then having the right inventory in the right places.

So we continue to see those areas deliver better-than-average results, as noted in the release, in food and agriculture, oil and gas. And I think some of that has been well documented previously. So other than that, I think it's typical type situation, and some of which I think, as you look at our overall performance we are trending in much better spot than what the MSCI is reporting to have happened. So -- but we're going to continue doing what we have to do which is take care of the customer.

And give the best service there is out there, and I think I'll all else will take care of itself.

Kevin Richardson -- North American regional president

This is Kevin Richardson. Just more commentary in terms of an end market that's impacting aluminum as we are starting to see the effects of the well-publicized drop in the class A truck market, and the current outlook for 2020 right now is to get back to about 2016 build levels which is down 30%, and it's -- if you look at it on an absolute basis, it's actually a pretty good build rate, but it's coming off of a peak. So that's about a 30% drop in terms of what's anticipated next year relative to this year.

Martin Englert -- Jefferies -- Analyst

OK. So just to make sure that I'm reading it right. Based on some of your end market commentary and then your analysis of kind of eight quarters may be of a downturn average duration. When we think about the industry as a whole and look at like MSCI data volumes as a proxy, would you continue to expect year-on-year contraction for the industry moving through first half of '20 based on what your customers are seeing? And what you're kind of thinking internally?

Eddie Lehner -- President and Chief Executive Officer

Yeah, Martin, this is Eddie. I mean -- I think we will have to deal in probabilities. And I think if we get -- if we see prices stabilize and it looks like prices are stabilizing, hopefully what we see is the middle of Q1, we start to see prices going up, average costs and inventory coming down as I noted with demand surfacing about that that time. So I think we come through that blackout period, which coincides with China's New Year, which is sort of how it's been the last several years.

And once we get to about mid-February, I think the probabilities are weighted more toward seeing recoveries in price and price recoveries and demand as we get to about mid-Q1, and hopefully, we build from there.

Martin Englert -- Jefferies -- Analyst

OK. That's helpful in understanding the cadence there. And then when you look at your downstream end users, any insights into their inventory positions and plans over the next couple of quarters, both as you think about their metals inventories that they're holding, as well as finished goods that are containing metals further downstream.

Eddie Lehner -- President and Chief Executive Officer

Yeah. I'm going to ask Mike and Kev to comment on that in just a minute. But I would say, in general, moving through the fourth quarter at least, I think people are still adjusting their inventories lower.

Mike Burbach -- North American regional president

Yeah, Martin. This is Mike, again. With the price uncertainty that we've seen, there seems to be a correlation with how people approach their inventories when they think tomorrow's price is going to be lower. So I think just given the time of year, there is a trend right now to to lean out inventories.

But it's a customer by customer situation. We -- I've heard people taking them down. I've heard other people thinking differently so, but generally, if there was an overall trend that would say, given the time of year, you would see little bit of a retraction on inventory levels.

Kevin Richardson -- North American regional president

One other thing that I would add is I think with the drop in the CRU and Eddie referenced some of the historical numbers and where it is right now, I think there is consensus in the marketplace with our customers, thinking that it's got to be closer to the bottom in terms of more -- there's going to be more to the upside than there is to the downside. So just in the last week or 10 days, we're starting to see some contract customers getting ready to make a move and commit.

Eddie Lehner -- President and Chief Executive Officer

Yeah. I mean I think -- Martin, I'll tell you. Going back to 2015, again, what was so instructive about the end of 2015 was you saw HRC 400 in that range. it really started to cause supply chain destruction.

I mean, real supply chain destruction. And so even with a CRU print today, even though we're still two weeks away from the official CRU number for the December reset, CRU print today at $444 tells you that, again, when you look at the probabilities -- because it always looks real -- I mean it looks bad in the moment but when you look at the probabilities with the 10-year average HRC price being about $623. And it having being above $475 88% of the time. I think you just go back and you look at the probabilities.

I mean, we don't know if at any moment in time over the next 30 days, it may trade below even today's CRU print. But again, you go to the probabilities, and it really looks -- it looks like the conditions are present for that price to start moving higher.

Martin Englert -- Jefferies -- Analyst

OK. I would imagine if they don't get it with this round of price increases are into early 2020 than you'll have to see some supply side response from the mills here. OK. Thanks for all that color folks and good luck.

Operator

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

Eddie Lehner -- President and Chief Executive Officer

Hey, good morning, Chris.

Chris Terry -- Deutsche Bank -- Analyst

Good morning. Just a few questions for me. A lot in that first part. Just in terms of some of the legacy contracts at Central Steel & Wire.

Just wanted if you could talk through the timing on that? And just discuss the inventory-level clearing? Thanks.

Eddie Lehner -- President and Chief Executive Officer

Sure. I'm going to take that over to Jim Claussen, who's with us today. I would tell you this. I mean the Central's got 85% exposure to carbon and at the point where we closed on the purchase of CS&W.

As you know, we were at peak in industry conditions and Central had, had a history of really going long physically against their contract commitment. So we -- that naturally exacerbated this unwinding process amid this margin mudslide. So I think there's a lot to work through in that, and I'm going to kick it over to Jim and he'll walk you through some of the finer points.

Jim Claussen -- North American regional president

Yeah, Chris. As Eddie said it, we really started with a extremely long position in last -- at the end of last year, and as we've gone through this deflationary cycle, we've worked down the inventory levels to where we can start to balance out the supply and demand side of our business. The team's done a really nice job working those levels down, however, we've done it as prices have deflated throughout the year, quarter over quarter. So as we see replacement costs could get above our average cost inventory as the inflection happens, we'll be in a really strong position going forward.

Chris Terry -- Deutsche Bank -- Analyst

OK. And just in terms of thinking about where we are in the cycle, and I think you're still targeting 20% gross margins. Just wondering how you're thinking about that? How long that might take? And just your latest thoughts on the -- your ability to expand the margins back out?

Eddie Lehner -- President and Chief Executive Officer

Yeah, absolutely. So let me give you a perspective, OK? So I -- as I would do in my prep for the call, I go back and I look at Ryerson in terms of four games, and one game was played between 2007 and 2010, another game was played between 2011 and 2014. We just got finished with the last game, which was 2015 through 2018, which takes you through the beginning of a countercyclical period all the way up to maybe another cyclical peak at least in our industry when you look at the numbers. And so we're starting this fourth game, right? Of 2019 to 2022.

And when we look at what's going on with our value add and the investments that we're making. When you see HRC go from 400 plus down to $444, you've got to deal with that. And the good news is, we've been through it enough times now that we know how to run this countercyclical playbook. But in the next four years, I certainly expect us to stabilize around that 20% target in the next four years, and we've said that.

Chris Terry -- Deutsche Bank -- Analyst

OK, OK. And just the last one for me, on specifically on the price hike announced last week in carbon. Can you just talk about the reaction to that in the market since? And how that's going downstream?

Eddie Lehner -- President and Chief Executive Officer

It's really early to say. As long as the CRU keeps going down, it's going to -- that's going to somehow counteract that. So I think we really have to see where the reset number comes out in two weeks. But I think it's reflective of this and that is, if scrap prices are going to be up 10 to 20%, and lead times are at least going to stabilize, then at least you have the conditions, with imports being where they are, you have the conditions for those price increases, at least part of them to start to stick.

Now the fourth quarter is always an uncertain time for taking inventory positions just because seasonally demand is softer, and you have less shipping days in that period. And as Mike referenced, it is very true that as prices are falling, people don't tend to take that replacement cost into their inventory if they think tomorrow's price is going to be lower. All that said, this'll take a little bit of time to matriculate. Even if price -- even if the price increases stick, the material that you're buying now, you're not going to get for one to two to three months.

So I think that puts us into the first quarter of 2020, but I do think that given where prices are now, the recent price increases have a better chance of sticking than the ones that were announced in Q2 and Q3.

Chris Terry -- Deutsche Bank -- Analyst

OK. Thanks, guys. That's it for me.

Operator

Your next question come from the line of Joel Tiss with BMO Capital. Your line is open.

Joel Tiss -- BMO Capital Markets -- Analyst

Hey, guys. So CS&W, I don't know if you said how many -- what's their average days of inventory versus Ryerson and kind of how long is it going to take to mesh the two together to get them to be more like you guys?

Eddie Lehner -- President and Chief Executive Officer

Yeah. In the script, we referenced 92 days. They have been as high as 140 days. I mean when we acquired, they were actually about 140 days.

So we've taken about 50 days out. And that realignment continues as it resets to really what we think is intrinsic demand as you go through the different seasons of an MSCI type year. So we're going to see convergence between their inventory turnover metrics and Ryerson's existing inventory metrics. With -- maybe just a little difference in that, Central's more weighted to long and tube.

So we might carry two to three to four to five more days, just given the mix of sheet versus long and tube, but you're going to see a convergence for Central. It's going to get below 90, and it's going to start trending toward 80 as we get through 2020. Jim?

Jim Claussen -- North American regional president

Yeah. I mean -- Eddie, you answered it pretty completely there, I would say. We're really into that next phase of inventory using analytics, really making sure we have A items placed appropriately for customers, working through some of the tailing out of B or C items that were over positioned. Takes a little longer, obviously, to change your position on a B and a C items than it does on an A, and we're working our way through that.

We're -- I would say we're -- to that next phase. And Eddie -- as Eddie said, we're working our way into the 80s and should see a pretty good convergence here.

Eddie Lehner -- President and Chief Executive Officer

Yeah. I mean, Joel, as I kind of referenced. I mean metaphorically, I just -- it really feels like we're starting that fourth game in that four year period and it's like an NBA game, and it's like we're early in the first quarter, and we're a really good team. So I like our chances.

Joel Tiss -- BMO Capital Markets -- Analyst

Yeah. You guys have done a very -- like very consistent, methodical improvement through all the variations that the end markets keep throwing at you. And are there any -- is there work still to do on sort of like your customer CS&W base, some of them, I'm sure, are better than others in terms of profitability or volumes. Or is a lot of that you can spread it across all the different products you have, including Ryerson, and you don't really need to do a whole lot of like product line simplification and customer calling?

Eddie Lehner -- President and Chief Executive Officer

Yeah. You know, one of the really great attributes of Central is -- and I think we mentioned this before, with such a unique acquisition in this way is that Central has customer goodwill. I mean, they really have good brand value and a good brand in the marketplace. But the operation itself needs modernization.

And so, I think the commercial portfolio was really well situated, and actually, we've seen a really nice synergy, and that's continued even through this downdraft. We've seen a really good synergy between Ryerson and Central in terms of Ryerson being able to tap the Central inventory to enhance its product offering across the Ryerson network of customers that pre-dated the Central acquisition. I think with Central, Joel, the real key is to modernize the operation of the systems in that business to get their cost very close to Ryerson current cost benchmarks and working capital benchmarks, and there's a lot of operating leverage in that business, but it really needs to go through a systems and process reengineer modernization.

Joel Tiss -- BMO Capital Markets -- Analyst

OK. That makes sense. And I didn't hear if you guys gave a free cash flow estimate for 2019? Even if it's kind of a ballpark-ish.

Erich Schnaufer -- Chief Financial Officer

We didn't give a number, but we said that we would continue to generate significant cash flow in the fourth quarter. Again, we hit our seasonally low inventory and AR balances. And so that throws off a lot of cash in the fourth quarter.

Joel Tiss -- BMO Capital Markets -- Analyst

OK. And then just last one for me. Can you talk a little bit about the balance, like more philosophically, between using your liquidity for further debt reduction? Or looking to consolidate the industry a little bit more, given that it's kind of a difficult environment for everybody out there and might be some real opportunities? Thank you.

Eddie Lehner -- President and Chief Executive Officer

Yeah. There's are a lot of deals that are coming to market, Joel. And let me say this: I mean, if you look at our industry, in general, there's not a lot of general line service center businesses that are a lot attractive that carry enough goodwill that to get us interested. I think that they're either distressed and you take on that challenge, and you buy below book value, or you find something that is really highly differentiated that adds a lot of value, and you look for those gems, and then you really try to pay a reasonable multiple for those businesses.

But I mean, given that we have Central, and we're just really a little bit over a year into that, and if you go back and look it over -- if you look over the last three years, I think our record for M&A has been really, really good, I mean, Central, Fanello, Guy Metals, Laser Flex, STS. I think we need to take a little bit of a pause. I mean, we won't turn our back on something that's really great, but I think we need to take a pause, use our cash, pay down debt, deleverage, then get our coupon down and really kick off that virtuous cycle. And we've looked at -- as we really envision this shift in enterprise value from debt to equity, if you look at where the -- where our average selling prices today at around, I think, was it 18 47? If you look at our average selling price today at 18 47, and if you look at the average ASP, really, I'd say, in the industry, over the last 10 years, there's still another $100 per ton roughly that you would ring out of the balance sheet going from today's price to about the industry average, all things being equal.

So we've got a lot of cash still stored up on our balance sheet. There's still a lot of cash there, and I think our operating model continues to get better as we move forward. Plus, we're going to see lower cost in inventory as we move through the next several quarters, so we're going to get that margin reset. And in 2016 -- going back to a question that Chris Terry asked, if you look at our margin performance in 2016, it was great.

And I think if we're going to have to go through these boom and bust margin cycles, there really is -- there is sunshine on the other side.

Joel Tiss -- BMO Capital Markets -- Analyst

That's really great. Thank you so much.

Eddie Lehner -- President and Chief Executive Officer

Thanks, Joel.

Operator

Your next question comes from the line of Phil Gibbs with KeyBanc Capital. Your line is open.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hey, good morning.

Eddie Lehner -- President and Chief Executive Officer

Good morning, Phil. Cleveland rocks, man.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

You got it. Absolutely. First question is just on this GM strike and how that's played into the psychology and then maybe some of the various different end markets or whether it has -- I mean, it's deserving to be discussed because we haven't seen something like this since the 70s.

Eddie Lehner -- President and Chief Executive Officer

Yeah. No, that's a great question. I think, practically, it's really had an effect. And I think that's been well reported on.

I think there's also been the Volvo Mack Trucks strike as well. So you've got two strikes going on in the fourth quarter that certainly haven't helped metals consumption. Kevin's a little bit closer to it, so I'm going ahead and kick that over to him.

Kevin Richardson -- North American regional president

Hey, Phil, we don't do a lot directly –

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hey, Kevin.

How are you? We don't do a lot directly in automotive. So it really hasn't impacted us in a big way in terms of direct customers. We do have some Tier 2 relationships that -- it's been somewhat disruptive, but not -- it hasn't been a big needle-mover for us. I think it's more about the psychology of what that does on the supply side in terms of from the mills and what that does to capacity utilization.

But in terms of demand impact to us, it's been pretty insignificant at this point.

Yeah. It's just been interesting to see the mills continue to produce at an 80% rate, I think despite the fact that probably there are some sales that aren't taking place at the moment. So there's certainly some level of supply being stored, you know perhaps --

Kevin Richardson -- North American regional president

Yeah, I think –

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Go ahead.

Kevin Richardson -- North American regional president

No. I was just going to say I think that's our read as well in terms of the impact on the producer side. And I think the capacity utilization is actually down into the high 70s. Now I don't know mill by mill, but I think on a blended rate, it's actually below 80% now.

Eddie Lehner -- President and Chief Executive Officer

Phil, if we do some napkin math and you just look at the change in imports, but look at where MSCI shipments are coming out on a monthly basis, we're trending back to that 2016 level of shipment. So if you take that delta in imports, and then look at the change in domestic -- domestic output, I think your conclusion is more accurate than mine.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

OK. Thanks, Eddie. A question is as it relates to you all -- I mean operating expense side. I expected operating expenses to be a bit lower than they were.

Was there some integration expenses that you still have running through from the side of Central that are kind of hanging in there? Because I noted that you all talked about, in your script, that there's some leverage to come and or lower, I think you said renovation of expenses to come. So curious in terms of how we should be thinking about the expense side moving forward.

Eddie Lehner -- President and Chief Executive Officer

Yeah. I mean, we've been carrying some improvement project costs across the water, and that's going to benefit us. I mean, as we see our operating leverage improve as we come up to the next upturn, some of the projects we're doing are going to be very worthwhile and early returns on those projects are really positive. So you don't get the full monetary benefit as you're in the midst of those projects, while the industry's deflating.

But certainly, we've got some really good work that we can do in terms of rationalizing cost across our network, and that -- Central's certainly a big part of that, but we've got some work we can do across Ryerson as well.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

And last question here, Eddie. You had mentioned some systems and processes needed to reengineer Central, I think maybe on the analytics side, to get you up to where you've been trying to get the legacy business. What is that going to potentially cost or is costing from a capex standpoint? Or are those cost being run through the operating expense line, how do we think about that? Thank you.

Eddie Lehner -- President and Chief Executive Officer

Yeah. I mean I'm going to kick it over to Jim in a sec. I would just say right now that the cost hasn't been that large because we're going through the reengineering process of documenting what those processes and systems are going to be. But as they start to mirror Ryerson, and we start to think about how to hub CS&W into our existing ERP environment, there'll be a cost to that.

But I think you can't go faster than the organization can assimilate those changes. And so I think into 2020, we're going to see some changes, but we don't see the cost as really being that high. We'll take it and measure in doses because we have to move with the workforce and with the other restructuring activities that are ongoing. Jim?

Jim Claussen -- North American regional president

Yeah. We -- anything that's been done on the system side would have rolled through opex in that regard this year, but it has not been significant in the way we're doing things. So really working on the operating model, putting the processes in place, and then we'll look to be modernizing the systems as we go forward, as Eddie said.

Eddie Lehner -- President and Chief Executive Officer

Yeah. I mean, Phil, we really want to keep building the tangible net book value of the company, and we've made really good progress in that regard over the last four years, and I think that's a good thing for us to focus on. It's -- just continue to build that tangible net book value of equity across the enterprise.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks so much.

Eddie Lehner -- President and Chief Executive Officer

Take a page out of the Warren Buffett playbook.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Yeah. Get the mojo going.

Eddie Lehner -- President and Chief Executive Officer

There you go.

Operator

Your next question comes from the line of Matthew Fields with Bank of America. Your line is open.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Hey, guys. We saw the 444 data point from CRU, but understand that works on a lag. And then steel market update seems to see kind -- spot prices trending more toward about 480. So it seems like that $40 per ton price hike's kind of working.

Are you seeing indications that would sort of bolster that train of thought?

Eddie Lehner -- President and Chief Executive Officer

Yeah. I mean, Matt, it's early. I mean you don't know until you know. I mean I -- again, I think that we thought that in April, May, we thought that in July, August.

I mean we're going to have to see, I mean really, how the mills enforce that price increase across the spectrum of demand. I mean we have to see. I mean early indications are positive. If you look at the same SMU Sentiment Index though, that sentiment index spiked up at the time that the last metal price increases were announced in April, May and July and August.

So really, I mean it's really up to the mills. It's up to the mills and it's up to the customers.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

And is that -- is there -- do you think the recent announcements on price hikes are informed by November scrapping up 20 or is that sort of November being up 20 kind of have a further upside to where we are now?

Eddie Lehner -- President and Chief Executive Officer

I think it's helpful. I mean, I think if you look at iron ore. Even Iron ore -- even though it spiked to 125, it's still in the 80s. And so scrap is certainly a better value than, I'd say, fully yielded iron costs or virgin iron cost through a blast furnace in the BOF, scrap is still the more attractive alternative.

You see scrap up by $10 or $20, and you pig iron prices still above $300. There is some support for those increases as we move into Q1, just noting that Q4 is softer on the demand side. But if you look at the cost push side of it, supply side of it, there should be some support there for prices to come off their current level.

Kevin Richardson -- North American regional president

Matt, it's Kevin. One other data point that just supports the direction of hot roll. If you take a look at the future's number, the premium for Q1 is about $60 a ton over today's number. And I think that market is gaining liquidity in terms of the number of contracts over the last couple of years in terms of the buyers and sellers in the future.

So anyways, that number is a $60 premium over a today's spot.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Over the 444?

Kevin Richardson -- North American regional president

Yeah. It -- I think the print actually came out today. So this was a as a couple of days ago. So that directionally -- it's about -- that spread should be about right.

Eddie Lehner -- President and Chief Executive Officer

Yeah. I mean I think the first half is showing $570, and I think Q1 was showing $540. It's a pretty big spread there. But again, I think on the cost push side, when you triangulate iron ore, scrap and pig iron, there is some support for these increases.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

All right. Thanks. Thanks for that. And then -- appreciate the guidance on cash flow generation in the fourth quarter.

Is there any way we can kind of put some brackets around a range of cash flow generation you're comfortable forecasting?

Erich Schnaufer -- Chief Financial Officer

Well, I mean if you took a look at where our inventories and AR has come down in prior years in the fourth quarter, you can get a pretty good sense of the magnitude of what we're going to generate in the fourth quarter, together with what your -- what the estimates are on EBITDA in the fourth quarter. But overall, the biggest driver is going to be depending on where AR balances end the year and assumptions on inventory.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

So your kind of working capital adjustments in the fourth quarter of the last three years have been 50, 90 and 90? We take an average of those? Are we in the right ballpark?

Erich Schnaufer -- Chief Financial Officer

Yeah. That's in the right ballpark. Yes.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

And then lastly, I think I ask the same question on kind of every call. I'm waiting for it. What are you guys waiting for in terms of other than sort of capital markets that tell you you're going to get a 5% coupon on an unsecured bond. What are you waiting for a refinancing? Is it kind of a leverage number? Is it a gross dollar amount of debt that you'd like to be at? Like what do you think is kind of the right trigger in a capital market that's kind of been open for a while.

Eddie Lehner -- President and Chief Executive Officer

You know, it's open -- it's open, Matt, but it's open at a price. And I think if you look at spreads between Bs and CCC or even single Bs, portfolio managers have really, really diagrammed out the play. And I think like once everybody has the chance to digest what was a really, really good year for PMs in the corporate bond market. So just given that we're between year three and year two of our call period to pay an incremental premium when we we consider the business to be improving and unless we get into a really long date of recession, which again, the probabilities don't connote that right now, we think we're going to have better opportunities moving forward to refinance.

So let's see what the market looks like when the lid comes off in 2020.

Erich Schnaufer -- Chief Financial Officer

You know, another thing that we did during the quarter as we went out and we got our third rating, as you know. We had a split rating between S&P and Moody's, with Moody's being two notches below S&P. And so by going out and getting Fitch's rating which reaffirmed the B rating on our notes outstanding, which is the same as S&P, we're hoping that that investor education is going to get out into the market as well, so that when we go out and do the next refinancing you know they really sharpen their pencils on what is the right coupon for a new issue going forward. And again, as Eddie had said, the next step down in our call takes us from 1005 down to 10275 and that's $16 million in savings.

That's not a small number.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

So is it fair to say that that may step down, is kind of that the first time we could start to expect something?

Erich Schnaufer -- Chief Financial Officer

That, unless someone wants to give us 5%.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

All right. Fair enough.

Erich Schnaufer -- Chief Financial Officer

Yeah. I mean, thanks, Matt.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

All right. Appreciate it, guys.

Erich Schnaufer -- Chief Financial Officer

Thanks.

Eddie Lehner -- President and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Sean Wondrack with Deutsche Bank. Your line is open.

Sean Wondrack -- Deutsche Bank -- Analyst

Hey, guys. Good morning.

Eddie Lehner -- President and Chief Executive Officer

Good morning, Sean.

Erich Schnaufer -- Chief Financial Officer

Good morning.

Sean Wondrack -- Deutsche Bank -- Analyst

So just a couple of questions on some of the comments. And once again, I appreciate all the color you're giving here. Class A truck market and sort of your expeditions for next year given that's one of your bigger markets, how do you expect to mitigate sort of the decline there? Is there anything you can kind of do about that internally? Or is it sort of just whatever the market kind of hands you?

Eddie Lehner -- President and Chief Executive Officer

Yeah. I'm going to have Kevin comment on that. But when we through it in 2016 and going back up to this recent a build rate peak. I think we did a really good job of taking out some costs and taking out inventory, and really adjusting inventory to the build rates and working with our customers to continue to maintain margins from a cost to serve versus margin versus inventory perspective.

But I'll let Kevin give you more on that.

Kevin Richardson -- North American regional president

Yeah. Hey, Sean, the only thing I would add is with 100 locations and a geographic footprint that's all across North America, there's all kinds of opportunities to offset any one end market in terms of the investments we've made in value-added processing and in multiple product lines. So it's just not like we're just an aluminum distributor, and we're at the mercy of the markets that drive that. So there's plenty of opportunities to offset it.

We do have a relatively high market share in that end market. So we go up and down with it. It's been a great end market for us over the years. And the other thing that I didn't mention is Class A gets all the headlines, but if you look at Class 5 and 7 trucks, that's a much more moderate decline going into next year.

That's about 5%. And then there's other ground transportation vehicles that we service for end -- parts of the end market. Think about ambulances and fire trucks and things like that. So it's not just the Class A, but there's plenty of opportunities to go offset things like that.

Sean Wondrack -- Deutsche Bank -- Analyst

Got you. That's helpful. And then in terms of oil and gas. You kind of noted some weakness there.Have you seen that kind of turn the corner here? Or are we sort of in a period of of uncertainty, so that's kind of restricting buying to a certain degree? What kind of patterns do you see?

Kevin Richardson -- North American regional president

Hey, Sean, it's Kevin. I'll take that one too because I handle the Texas and Oklahoma area. For starters, that's a relatively small end market for us. It's about 5% of our revenue.

So it's -- it obviously -- it's more heavily skewed in the geographic pockets it services. But to answer your question, It is down. We don't see a big rebound. And what's interesting, if you look at the production, the U.S.

oil production right now is at record levels. It's like 12 and a half million barrels per day, but the extraction has become so much more efficient, it's just not as capital-intensive in terms of the equipment to get it out of the ground. So if you look at -- the rig count's down 20% from last year. And if you look at the drilled and uncompleted wells, they've also been declining for the last six months.

So there's not a lot that we see going into next year that says that that's going to snap back, even with record production. But again, on a relative basis, that's a pretty small end market for us.

Eddie Lehner -- President and Chief Executive Officer

Well, and I think we're seeing, too, a transition from downhole capex more to above ground in the distribution capacity of how you take it away and get to where it needs be in the oil and gas sector. And I think Mike's got a good perspective too because he's got -- Mike's got Western Canada.

Mike Burbach -- North American regional president

Yeah, thanks. Thanks, Sean and Eddie. I think we see the same things. I think Canada has its own set of challenges that might be a little different than what Kevin described.

But fundamentally, with the investments we've made and the inventory we put in place, we've actually been able to fare fairly well considering the overall conditions. So -- but the overarching issues that Kevin mapped out are pretty much the same up in Canada.

Sean Wondrack -- Deutsche Bank -- Analyst

OK. Thank you for that. And then Eddie, just to kind of go back to a couple of comments you made earlier about these deflationary periods that are usually roughly eight quarters or about -- it's three quarter now, would you say that the magnitude of sort of the impact on EBITDA is felt earlier on in these periods and you're able to sort of stabilize to a certain degree kind of in the last few quarters? Or would you say it's pretty even throughout?

Eddie Lehner -- President and Chief Executive Officer

Oh, no. I mean, I think you chase that boulder down. And then when you start to get that retracement, as average cost starts to converge to replacement cost and then moves below replacement cost, you really start to see an expansion of margins and you start to see a really positive impact on EBITDA. And that's been the history if you go back and look at how we performed in those countercyclical and cyclical periods.

So I mean you do chase it down, and I think we're seeing some of that in the results in quarters two and three, but having been through it several times and just looking at the leverage we have, the positive operating leverage we have and the business coming up on the other side and the acquisitions we've done and the things that we've noted, I can't help but be positive moving forward. I mean again, I don't know. I mean if something exogenous happens or we get some type of extended, I'd say, economic downdraft, then you just got gut though over a couple of more quarters. But based on our historical analysis, we should be well past the halfway point.

Sean Wondrack -- Deutsche Bank -- Analyst

Great. And then did you do any on the upside -- how long the upside cycles basically last for?

Eddie Lehner -- President and Chief Executive Officer

You know, it's interesting. The upside duration tends to be a little bit longer, but its less impactful, and the downside duration tends to be shorter and more impactful, if that helps. So it's typically about eight quarters of -- on the downside, say, seven to eight. It's typically about nine to 10 on the upside.

And as we've modeled it in the macro, that upside tends to be a little bit more muted than the downside is. But we certainly -- we look forward to that upside.

Sean Wondrack -- Deutsche Bank -- Analyst

Great. Thank you very much for answering my questions.

Eddie Lehner -- President and Chief Executive Officer

Yeah, you're welcome.

Operator

Your next question comes from the line of Phil Gibbs with KeyBanc Capital. Your line is open.

Eddie Lehner -- President and Chief Executive Officer

Double shot.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Back at it. Back at it. Question just on the value-add business in terms of how you define it, Eddie, and how much is that right now as a percentage of your mix that value-add first-stage processing-type business? And where do you -- where would you like to get that over time?

Eddie Lehner -- President and Chief Executive Officer

Yeah, no doubt. So let me -- I'm kick that over to Mike and Kevin. Let me tell you, in general, once we get past cut the length -- so you've got as is distribution, you've got cut the length. Then you get into the what we consider to be the heavier value add as you move from more general on value add to more advanced processing and even some contract manufacturing, we've seen that trend emerge nicely in our company, but as you know, it's a grind and it moves up and down with the cycles,.

But we've seen that progress really nicely in the company, Phil. And I would say just over the last 12 to 18 months, we've probably picked up about 50 to 60 basis points there. And I'll have Mike and Kevin give you some more color on that.

Mike Burbach -- North American regional president

Hey, Phil, this is Mike. So the definition is somewhat subjective to the situation, but as a rule of thumb, as Eddie mentioned, we process a lot of different things, a lot of which are quite simple and we don't put into the value-add category. But I would say something that has multiple processes done to it, so a burn and a band, a laser cut and a tap pull, whatever those things might be and in many cases, it goes multiple steps. That's -- would be our definition of value add.

And a lot of which we're getting pulled into this direction by a number of customers to help them take out processes that they used to do in-house. And so they're looking to us to not just ship them the plates or the sheets and for us to take that work away from them, and they can focus on the areas that they're looking to be better at, which would be more in the assembly, marketing, design going forward. So I would say our value add is multiple step processes and beyond.

Kevin Richardson -- North American regional president

Phil, this is Kevin. The only thing I would add to that, if you look at the acquisitions we've done prior to Central Steel & Wire, the main focus has been on value-add capabilities, Laserflex, Fanello, Guy Metals and STS have all given us capabilities. And the idea there was just to also build that business and grow with all of the commercial contacts that Ryerson has. So it's a combination of an M&A strategy and also some of the equipment that we've deployed internally.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

I get the strategy. I'm just curious where you are in terms of the game. You said had multiple steps. And just trying to understand how much of that is relative to your business? Is it 10%? Is it 40%?

Eddie Lehner -- President and Chief Executive Officer

Yeah. I mean the way we measured beyond cut the length -- so we're moving toward 11%, and longer term, we would like to see a target of 15.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Are you saying that includes cut to length? Or that does not cut to length? I'm sorry.

Eddie Lehner -- President and Chief Executive Officer

No, no. Beyond cut to length. So what we consider to be value-add beyond just general line processing.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

OK. Thank you.

Kevin Richardson -- North American regional president

And by moving from 10% to about 15%, that should add about 30 to 50 basis points to our gross margins on a consolidated basis.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks, gents.

Eddie Lehner -- President and Chief Executive Officer

Thanks, Phil.

Operator

And there are no further questions at this time. I will turn it back over to the presenters for closing remarks.

Eddie Lehner -- President and Chief Executive Officer

Thank you for spending a part of your morning with us, and we look forward to seeing all of you in the New Year.

Operator

[Operator signoff]

Duration: 70 minutes

Call participants:

Justine Carlson -- Investor Relations

Eddie Lehner -- President and Chief Executive Officer

Erich Schnaufer -- Chief Financial Officer

Martin Englert -- Jefferies -- Analyst

Mike Burbach -- North American regional president

Kevin Richardson -- North American regional president

Chris Terry -- Deutsche Bank -- Analyst

Jim Claussen -- North American regional president

Joel Tiss -- BMO Capital Markets -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Sean Wondrack -- Deutsche Bank -- Analyst

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