Radius Recycling Inc (RDUS) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Schnitzer Steel's fourth-quarter 2004 earnings conference call. My name is Brian; I will be your conference call coordinator today. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session.

Before we begin, the Company has asked me to read the following statement. Today's presentation by management contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 Safe Harbor provision. One can identify these statements as they do not relate strictly to historical or current facts. Examples of factors affecting both Schnitzer Steel Industries, Inc.'s consolidated operations and its joint ventures that could cause actual results to differ materially from current expectations are the following; volatile supply and demand conditions affecting prices and volumes in the markets for both the Company's products and raw materials and purchases, world economic conditions, world political conditions, changes in federal and state income tax laws, impact of pending or new law and regulations regarding imports and exports into the United States and other foreign countries, foreign currency fluctuations, competition seasonally, including weather, energy, supplies, freight rates and predictability of joint venture operating results, and the inability to complete expected large scraps of export shipments in the current quarter.

One should understand that it is not possible to predict or identify all factors that could cause actual results to differ from the Company's forward-looking statements. Further information on these risk factors is included in the Company's filings with the Securities and Exchange Commission. At this time for opening remarks and introductions, I would like to turn this call over to Chairman and Chief Executive Officer of Schnitzer Steel, Mr. Bob Philip.

Thank you, and good morning. First I would like to welcome our listeners to Schnitzer Steel's fourth-quarter 2004 earnings webcast and conference call. We will begin the call with some general comments about the fourth quarter and also explain our views regarding the outlook for our business. Upon completion, Barry Rosen, our Chief Financial Officer, will make a few additional comments, after which we will open the call to answer a few questions from our listeners.

As today's press release reported, Schnitzer Steel ended fiscal 2004 in the same manner as it did last year by reporting both record revenues and net income. Looking back to this time last year, it would have been hard for me to imagine having the year we just completed. Revenues rose 39 percent to 688 million, and net income increased 157 percent to $111 million or $3.58 per diluted share. These incredible numbers were driven by two primary factors; strong pricing for recycled metal and finished steel products that were caused by significantly improved economic conditions in the U.S. and Asia, and second, sound strategic and tactical decisions made by the many managers in our business unit, including our joint venture businesses.

Looking ahead into fiscal 2005, I remain very optimistic. As this morning's press release indicates, the Company is expecting operating income for the first quarter of 2005 to more than double the level we achieved during last year's first quarter and even exceed the strong quarter we just completed. But before I focus on the first quarter, let me make a few more remarks about the fourth quarter of 2004. Looking back to the fourth quarter of 2004, we saw all of our business segments improve. In fact, the quarter's results even exceeded the earnings guidance from our last conference call. We expected operating income for the fourth quarter to be in the range of 45 to $52 million, excluding any impact from the LIFO adjustments at our joint venture businesses. In the end, excluding LIFO, we reported operating income of $63.3 million. The improvement between our guidance and actual results was primarily caused by higher than expected pricing for most of our products.

You may recall that as the third quarter ended, we began to see recycled metal prices firm. However, we did not expect to see ferrous metal composite prices reach the levels we saw earlier in the year. In addition, strong steel demand resulted in further price increases for our finished steel products.

Moving into our business segments, our wholly-owned metals recycling business reported operating profit of 21.8 million compared to 14.1 million in last year's fourth quarter. Fourth-quarter ferrous selling prices averaged $199 per ton, which were 45 percent above the fourth quarter of last year. During the fourth quarter of 2004, we also saw ocean freight rates moderate by 23 percent from the averages paid in the third quarter. The rise in fourth-quarter selling prices were offset in part by higher inventory costs, resulting from higher prices paid for unprocessed metal. Our joint ventures similar to our wholly-owned scrap business saw the recycling business report strong fourth-quarter results. Our share of the joint ventures operating income before LIFO adjustments were $25 million. This amount compares to 8.4 million reported in last year's fourth quarter.

Like our wholly-owned metals recycling business, we saw our processing joint ventures average selling prices decline from the record third- quarter levels, but were well ahead of last year's fourth-quarter average. Sales volumes in our processing joint ventures were up 15 percent from the prior-year quarter, which were mainly due to the timing variance between when export orders are received and when actual shipments are made. Our global trading joint venture increased its sales volume by 12 percent over the fourth quarter of 2003, due primarily to increasing market share in Mexico, as well as product-line expansion into other scrap metal-related commodities.

Our auto parts business continues to show solid growth. Fourth-quarter 2004 operating income totaled 7.3 million, representing a 27 percent improvement over the fourth quarter of last year. A portion of the profit improvement was directly attributed to the 3 new Canadian stores. However, our existing stores also showed good growth in both revenues and operating margins. The growing revenues were offset in part by higher inventory costs and increased spending to support the Company's growth plans.

Cascade Steel, our steel manufacturing business, reported record profits in the fourth quarter of 2004. Operating income amounted to $15.1 million compared to only $400,000 in last year's fourth quarter. Higher margins were directly tied to selling prices that averaged $511 per ton. Steel consumption remained strong and should remain so for the foreseeable future. The record selling prices were offset in part by increasing cost for scrap metal, alloys, electrodes, and electricity. As I mentioned earlier, I am very optimistic about the prospect of Schnitzer Steel in fiscal 2005. Here are just a couple of items I have noted from recent articles and industry analysts that give me optimism about the cycle we are currently participating in.

Many of you know much of the strength in today's world economy has come about because of the significant economic expansion in the world's most populous country, China. In 2000, China produced approximately 128 million tons of steel, representing 15 percent of the world's production. Three years later, China became the first country to produce more than 200 million tons of steel and increase its steel production to 220 million tons, representing 23 percent of the world's steel production. One year later in 2004, independent analysts estimate China's steel production will grow another 22 percent to approximately 269 million tons of steel.

You are probably asking where is all of this steel production going. What we have found is that almost all of the steel is producing -- that China is producing is being consumed in China as it develops its infrastructure and economy for its 1.2 billion person population. Besides steel, China has become the largest consumer of copper, aluminum and cement. Like me, you are probably wondering how long can China maintain its appetite for these commodities. I believe it's here for many years. The following are just a few things that lead me to believe this conclusion.

Currently, two-thirds of China's population or 800 million people live in rural areas and are not yet significant consumers of steel or beneficiaries of the current economic expansion. The Chinese government hopes to move an additional 400 million people from rural farmlands to new urban areas over the next 25 years. These large numbers imply that in order to accommodate this migration, China will have to continue to develop and grow its infrastructure across its nation to develop housing, roads, schools, railways, sewage plants, power plants and much more. To quote a recent Fortune Magazine article, the development needed to support this migration is of, quote, gargantuan scale.

Besides growth in China, we are seeing significant demand for both steel and scrap metal products from other Asian countries, including our long-time trading partner, South Korea, and newer partners such as Thailand and India. Many people believe Schnitzer's future is tied to China's success. In fiscal year 2001 through 2003, China was our largest export destination. In 2003, a little over 40 percent of our wholly-owned metal recycling business' ferrous sales volume was sold to China. Given the record pricing level in fiscal 2004, one would think Schnitzer increased its sales volume to China. However, our direct reliance on China fell to 25 percent in fiscal 2004, and South Korea became our largest export destination.

Also, as mentioned earlier, our joint ventures are also expanding their geographic scope with increasing sales volume to non-Asian countries like Mexico, Latin America, and selected European countries. We expect the first quarter of 2005 to be excellent. Our metals recycling business order book indicates that we expect first-quarter 2005 average selling prices to be significantly higher than the first quarter of last year's, and even above the average reported in the recent fourth quarter. During the last 6 months of fiscal 2004, we saw little buying activity from China. However, in recent weeks, we have seen Chinese buying increase. An indicator of the domestic scrap market strength is the factory bundle index which is reported by the American Metal Market. Factory bundles are a special grade of scrap metal. On Monday of this week, the American Metal Market reported factory bundle prices rose $38 to a new record of $423 per ton.

Looking at expected sales volumes, we traditionally see the first fiscal quarter of each year to be one of our lowest sales volume quarters. Our wholly-owned metals recycling business sales volume should approximate 430,000 to 475,000 tons. This amount is lower than the volume shipped during the fourth quarter of 2004, but well ahead of the 409,000 tons shipped during the first quarter of 2004. Partially offsetting the higher average first-quarter 2005 selling prices are increasing costs for ocean freight rates. We also expect the cost of unprocessed metal to generally follow the upward sales price trends.

Moving to our steel manufacturing business, domestic steel consumption remains strong. In fact, last week it was reported that steel production was at 2.03 million tons, implying mills were running at an unusually high capacity of 91.8 percent. First-quarter 2005 average selling prices should be modestly ahead of the fourth-quarter average and significantly above last year's first-quarter average. We expect first-quarter 2005 sales volume to decrease from the fourth quarter of 2004 level, due to seasonal declines in demand. We also expect fabricators to work off inventories during this seasonally low time of the year. We anticipate that sales volume should approximate 140,000 tons, which is about the same level that we shipped in last years first quarter. The higher first-quarter 2005 selling prices are expected to be offset in part by higher raw material costs, including increases in the cost of always and electrodes. We do expect that electricity prices will moderate from our seasonal peak in August 2004.

In our auto parts business, overall we expect first quarter of 2005 retail demand to remain steady relative to the fourth quarter of fiscal 2004. We do expect significant earnings growth over last year's first quarter, due primarily to the addition of 3 new Canadian stores and higher wholesale revenues due to increases in scrap metal prices. These increases are expected to be partially offset by higher costs incurred to obtain inventory, which is directly attributed to the strong scrap metal market. We do continue to aggressively pursue expansion opportunities throughout North America, and hope to announce more details of such opportunities in the coming months.

In summary, the first quarter should shape up to be one of our strongest quarters on record. We currently expect first-quarter 2005 operating income to be in the range of 62 to $68 million, which is significantly above the $18.1 million reported in last year's first quarter and well ahead of the 57.2 million reported in the fourth quarter of 2004. Today's press release also mentioned that Schnitzer's Chief Financial Officer, Barry Rosen, plans to retire in June 2005. Barry has been Schnitzer's Chief Financial Officer for over 22 years and has been instrumental in helping us grow and improve our many businesses. Barry's insights and experience will be missed. Besides helping us develop and grow our business, Barry also developed and groomed a strong financial team. A combination of his excellent team and Barry's continued involvement over the next 8 months will allow us to smoothly transition Barry's responsibilities. I will now ask Barry to make a few additional comments about the press release.

Thank you, Bob. I would like to comment on a few other items contained in today's press release. Included in the discussion of the metals recycling business segment was a brief comment regarding the upgrading and modernization of our scrap facilities. This modernization program includes a planned replacement of the automobile shredder in the Oakland, California facility, which includes the construction of a new and efficient sorting system that separates the higher-valued nonferrous metals from the ferrous metals and other byproducts of the shredding process. We are also beginning a major upgrade in our Portland, Oregon exporting facility. Our long-term plans include replacing the existing shredder with a state-of-the-art machine and improve our exporting facility. Certain of this work resulted in a $3.5 million non-cash write-down of existing assets.

Two of our larger joint venture businesses utilize LIFO to value their inventory. The company has a policy to recognize a non-cash LIFO impact in the fourth quarter of each year. This year's LIFO charge reduced the Company's fourth-quarter operating income by $6.1 million, which compares to a $2.2 million charge in the 2003 fourth quarter. The Company's fourth-quarter 2004 general and administrative expense increased by $3.7 million over the 2003 quarter, which was due to a number of factors, including higher expenses to comply with the Sarbanes-Oxley regulations, rising insurance costs, and increases in professional fees. The largest single increase was a result of higher accruals for the Company's economic value-added base bonus plan. This plan covers nearly 400 of the Company's employees and directly ties bonus payouts to the underlying financial performance of the Company. The recent record financial performance of our Company has significantly increased the bonus expense.

The 2004 quarter tax rate was approximately 31 percent, with was 4 percentage points below our guidance and was primarily caused by lower than expected state tax rates, coupled with greater tax benefits derived from export sales. As many of you know, the export sales made by both our wholly-owned and joint venture businesses generally receive favorable tax treatment under the extraterritorial income exclusion benefit. We anticipate the first-quarter 2005 tax rate to be approximately 35 percent.

Depreciation expense was $5.4 million for the fourth quarter of 2004, and $20.4 million for all of 2004. Excluding acquisition costs, the fiscal 2004's capital spending was approximately $22 million. We currently estimate the Company's 2005 capital expenditures to be approximately $20 million. This amount excludes any amounts that may be spent on future acquisitions. On May 5th of this year, the Company announced that it had retained Bear Stearns to explore strategic alternatives for our steel manufacturing business. We are continuing to work with Bear Stearns, but have nothing new to report on this matter at this time.

Bob will now summarize the call and then open the conference call up to question.

Thank you, Barry. In summary, fiscal 2004 was an excellent year, and fiscal 2005 has the makings of another very good year. We will now open the call up to answer a few questions from our listeners. Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from Michelle Applebaum. Please proceed.

Fabulous-looking quarter there in a year.

Could you speak up? Excuse me, we can't hear you.

This is Michelle Applebaum from Michelle Applebaum Research. Can you hear me now?

Now we can. Thank you.

Terrific. Just awesome-looking quarter. You made a reference to expansion plans, and I presume that the sale of Cascade is going to be kind of a redeployment. What kind of businesses are you going to be looking for to expand? Are you going to be looking at other scrap companies or manufacturing?

Well, we're always looking at other scrap companies, but the major focus of our growth is in the auto parts business. And so the redeployment that should take place, then there is the sale of Cascade, that capital will be redeployed to grow the auto parts business, which is really our strategic initiative for this next year, the next several years.

So more along the auto parts line than scrap would be kind of the agenda right now.

Yes, both. I think we are looking for growth in scrap, but I think we have a little more control over how we can develop and grow the auto parts business. We think that is an opportunity that we can take advantage of (indiscernible).

Can you help me out, because I would think that your company has an outstanding footprint in scrap, an historical legacy. When you say comptrol, are you just referring to just our valuations expectations by private scrap companies out of control right now? Is that what you mean?

No, it is just more in the sense that the self-service auto-wrecking business, our Pick-N-Pull operations, we believe that we are one of the largest group of stores of self-service auto-wrecking in the country. Yet we only currently have 26 stores, primarily in Northern California and a few other Western states, a couple in the Midwest. So we think the opportunity is greater to grow that business because there is so many different markets that we have targeted that we think we have the ability to move into.

And it is just so fragmented.

Right.

My next question is, can you give an outlook on -- I've got 2 questions -- what you think would happen with scrap prices going forward? Then last year -- last couple of years we have seen China in their rainy season in the winter really slow down. I was wondering if you would anticipate -- what would you anticipate the outlook would be for scrap prices in the next quarter and the year, and then do you expect to see China, some seasonality there as well in the winter?

Normally, we're seeing China as well as Asia experience seasonality in the summer when power costs are at their highest. This year we saw the Chinese try to tap the brakes from about March through July. We saw very little scrap exported from the United States. As a matter of fact, the statistic that we have been talking about is our market share in 2002 and 2003, a little over 60 percent of our sales went to China. In 2004, the year that ended August, only 34 percent of our scrap went to China, and yet we saw the other Asian countries pick up the demand, pick up the need for scrap, and Korea became our largest customer. We are continuing to see that throughout Southeast Asia.

We think the prices for scrap are definitely very strong right now, and we don't have any indication that would lead us to believe that prices would go down. In fact, as you know, we book scrap -- we sell scrap ahead 60 to 90 days, and our press release has indicated that we are very comfortable with the estimates that we have given, which would certainly suggest that scrap prices in the future are not going down.

At least for the next quarter.

At least for the next quarter.

Can your crystal ball go out a little bit further than that?

Some of the analysts that are writing about demand for steel worldwide are showing an increase in 2005 -- worldwide increase in 2005 over 2004 and we feel that there is tightness for raw materials, not only scrap but pig iron, DRI and other scrap substitutes. We're going to certainly experience the same tightness in 2005 and all the indicators show that steel demand as well as steel production is going up in 2005 -- single digits but still at the level that we are producing today around one billion tons worldwide. We think there's certainly going to be some imbalances particularly in high-grade scrap, so-called low residual and products that are used for the higher value added steelmaking process.

So you're really saying you think prices could go up again?

I think that that's a very good possibility.

I know it's hard to say from these levels. I agree. Okay, thank you.

John Rogers, DA Davidson.

I was wondering, Bob or Barry, if you could talk a little bit about margins in your scrap business? Obviously they've gotten a lot better with pricing in the market. But if you look at over the last two quarters you had very strong margins in your fiscal third quarter and then they came down a little bit, but still very high on an historical basis. And as scrap pricing moves up and down I know it impacts because you're selling forward a little bit. But how should we think about margins going forward? Is this a new plateau at a midpoint between that $50 a ton which you would have had without that asset write-down -- the $70 you had in the third quarter?

You know that we don't give our forecast of margins out (multiple speakers), but what I have said in the past is that we think that we're in an entirely new fundamental year (ph) and ballgame with the increasing overall worldwide demand for scrap especially coming out of Southeast Asia and China. And that with scrap prices above $200 a ton, which they've been above for quite some time now, we think we'll continue at these levels or higher, as Bob indicated, that it kind of changes that normalized margin substantially from historical numbers. And I can't tell you where that's going to be.

We averaged about $20 a ton net margin for the first 5 or so years that we were public. But we've been substantially above that for a number of quarters now and with these prices at these levels we think that those normalized margins historically can be exceeded substantially in the future but we can't tell you what that might be.

One thing in October, look, is that we've spent a fair amount of money in capital improvements throughout the Company both at our wholly-owned business on the West Coast as well as we're in the process of installing new mega shredders on the East Coast. And the purpose of installation of these shredders is to cut our production cost. In the prior years we've also made significant improvements in our handling on our own wholly-owned dock facility and it's our plan going forward, as we also stated in the press release, to continue investing in new technology to improve our productivity and therefore push down our cost and increase our margin.

Okay, thank you. And just on the steel side if I could, you talked about very good pricing there. Is your pricing now in your fiscal first quarter -- is it higher than what we saw on average in the fourth quarter?

Yes.

Okay, great. Thank you.

Sal Gurani (ph), Goldman Sachs.

I just have a question on the Chinese import license, the new system they put in place. What are your thoughts on that? Is it beneficial for you?

We think it'd be very beneficial for us, unfortunately we're pretty confused as to what -- when and what they're going to require. One of the concerns that the Chinese government has today is overheating of their economy. And any shipper that can load a container anywhere in the world has been able to export scrap and China was able to import it. By requiring licenses it will definitely separate those major suppliers like ourselves and those that have the ability to load one or two containers. We don't think they're going to be successful in allowing -- the Chinese government will not continue to allow these small onetime shippers the ability to continue shipping.

The other problem that the Chinese government is worried about is contamination and receipt of munitions and dangerous substances from non reliable shippers. And they have experienced -- and this is one of the problems that the Chinese, as well as other countries, have experienced -- that the scrap that's being shipped in containers has contained hazardous and dangerous commodities and they're trying to discontinue or dissuade those shippers from shipping and also try to make it more difficult for them to ship into China. At this point it's really not clear exactly how that system is going to be implemented.

So (indiscernible) you can actually increase your share in the market in China if this gets implemented fully?

We're actually selling everything we can into China right now so that -- what we look for is which market will give us the best return. And as I mentioned, this year South Korea certainly was our major customer. The freight to South Korea is less than China, at least from the West Coast. We also shipped this year for the first time in a long time to India. We have regular business into Thailand and we also made some shipments into Japan which was also unusual this past year.

And our joint ventures are also experiencing increased market penetration in areas where we haven't regularly shipped, such as South America and Europe. Which is really a good sign for the scrap industry which means that many of the countries in Europe and former CIS area are trying to maintain the scrap within their own countries to build up their own steel industry which will also put more pressure on the supply side which is good for us.

You didn't mention Turkey. Has turkey been out of the buying business?

No, no. Turkey is a regular customer for us both from the East Coast and Europe, and Turkey has come back very strong as a buyer of scrap both from Europe and some from the East Coast of the U.S. No question, Turkey is a major participant in the steel business and certainly a major buyer of scrap. They were also a major recipient of scrap from the Ukraine and that flow of scrap has slowed down considerably and therefore their need to find other sources, particularly Europe and the East Coast, is also a very good sign for us since we do a significant amount of exporting from Europe and the former CIS countries of Russia and Poland.

Thank you very much.

Steve Nittle (ph) with Knob Hill (ph) Capital Management. (OPERATOR INSTRUCTIONS)

This is Jim Collins at Knob Hill; I'm filling in for Steve Nittle who had to go to a meeting. Bob, he said "great quarter". That's from Steve. He has one question he'd like to ask. Where will next year's Pick-N-Pull expansion come from on the East Coast?

We're looking all over, frankly. We now extend to Indiana and we're looking at opportunities throughout the United States. We think that Northern California is pretty well saturated for us with 17 stores. But there's certainly other markets that are asking for us to take a serious look at entering their market. And so we currently have interest in growing this business in certainly the areas that we're currently not operating.

Okay, thank you.

Gary Schumano (ph), Schumano Group.

It's hard to believe that when you folks went public your cash flow today is probably equal to what it was for 5 years previous to your IPO. Congratulations on a great quarter. I have real quick questions. How much of the scrap that you sell is a source from the Pick-N-Pull business and what do you estimate it to be going toward the future?

It's actually on a relative percentage basis a pretty small number. We don't give the exact tonnage, but it's -- we do a million -- 600,000 or 700,000 tons from our West Coast operations and we do 3.5 million tons or so from -- processing from our joint venture operations of about 5 million tons and Pick-N-Pull amounts to a relatively small percentage.

Right. But it could grow as you expand that business if you choose to do so?

It can, but our real focus is not so much to -- the access to the scrap for our shredders. Pick-N-Pull is a stand-alone business with its own business dynamics and business model, as you can see, and so that's not an essential ingredient for us to grow into these new markets whatsoever. Interestingly enough, the access to the auto bodies and these other markets could give us access to curse (ph) scrap businesses later, but that's not our motivation.

Question number two is your current debt -- what are you going to be doing with all your cash flow? I know you're going to make some acquisitions, but if you don't what are you going to be doing about your debt? What is it, about 80 million?

Yes. It's actually less than that. That information will come out with our 10-K. But we think with the aggressive growth that we have planned for the Pick-N-Pull operations as well as looking at operations in the ferrous scrap business that we will still be probably a net borrower.

Final question. Bob, 5 years ago -- as I said, China has shown great growth -- of the increase in the price of oil what is the consumption today in your opinion of oil by China of the world supply versus what it was 5 years ago?

I've read that to date China is using about 20 -- I can't give you the number on it -- I don't know. It's the second-largest user of oil in the world according to Wall Street Journal or New York Times. Recently they had an article on China. This week Fortune magazine actually has a phenomenal article on China that talks about in addition to the industrial growth, but the social and economic growth. And I think it's cited somewhere in the Fortune article this week.

And an increase in the price of crude has no bearing on your business, is that correct?

The only affect it would have is the trade rate for the vessels that we charter have certainly gone up, but as the freight rates have gone up so have our prices. So we passed that through to our customer.

Congratulations. Barry, maybe your handicap will go down, eh?

It had better.

Thank you.

Ladies and gentlemen, there are no more questions at this time. That concludes today's presentation. Thank you for joining us.

Thanks very much.