Radius Recycling Inc (RDUS) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to Schnitzer Steel first-quarter fiscal 2005 earnings conference call. My name is Carlo and 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 subject to the Safe Harbor provisions of federal securities law including estimates of future Company performance and views on future market trends. Actual results may differ materially from those projected in the forward-looking statements.

Examples of factors that could cause actual results to differ materially from current expectations are described in detail under the heading factors that could affect future results in the management's discussion and analysis section of the Company's most recent annual report on Form 10K.

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 very much and good morning. Welcome to Schnitzer Steel's first-quarter 2005 earnings webcast and conference call. I'll begin the call with some general comments about the first-quarter and the market outlook and then briefly address other matters of interest. Then Barry Rosen, our Chief Financial Officer will make a few additional comments. We will then open the call up to answer a few questions from our listeners.

Today Schnitzer Steel reported excellent financial results for its first fiscal quarter that ended on November 30th, 2004. Revenues rose 65 percent over last year's first quarter to $199 million. The Company's operating income came in at the high end of our guidance and amounted to 67.6 million which compares to 18.1 million reported in the first quarter of last year.

Net income grew 253 percent to 42.9 million or $1.38 per diluted share which exceeded our previous record high that was reported in last year's third quarter. The Company's strong financial performance is the result of strong pricing for recycled metals and finished steel products. Also (technical difficulty) our performance was driven by all of the business segments that showed excellent profit improvement over last year's first quarter.

Looking ahead into the second fiscal quarter of 2005 we continue to be optimistic about our business. As this morning's press release indicates, the Company's second quarter is traditionally it's weakest in terms of sales for two of its business segments; however, we believe our financial performance will remain strong in the second quarter and more than double the operating income level we achieved in last year's second quarter. However, before I comment further on the second quarter's outlook, I would first like to make a few more remarks about Q1.

Our wholly-owned Metals Recycling Business reported operating profits of 33.8 million compared to 9.9 million reported in last year's first quarter. First-quarter 2005 ferrous selling prices (ph) averaged $236 per ton which was 69 percent above the first quarter of last year. As most of you know the rise in selling prices is directly caused by increasing steel consumption in not only Asia but in other parts of the world including the United States.

Ferrous sales volumes increased by 15 percent over the prior year quarter to 471,000 tons which was due to the timing of when export shipments are made. Some of you may recall that during last year's first quarter our ferrous export volumes were adversely impacted by the rapid rise in ocean charter market that led to the delay in chartering ships to export our ferrous metals. Ocean freight markets continued to rise throughout most of fiscal 2004 and moderated slightly in the fourth quarter. However, as expected, charter markets firmed again in the first quarter.

On average first-quarter 2005 ocean chartering costs were 47 percent above the amounts recorded during last year's first-quarter. The rise in first-quarter selling prices and volumes was offset in part by higher inventory costs resulting from higher prices paid for unprocessed metal.

Like our wholly-owned Metals Recycling Businesses, our joint ventures also showed excellent improvements in profitability during the quarter. First-quarter 2005 income from operations amounted to 20.5 million, compared to 5.9 million reported in the 2004 first quarter. The joint venture's operating results were impacted by the same market fundamentals as our wholly-owned business. It also is worth noting that sales volumes for our processing joint ventures grew 38 percent over last year's first quarter which was due to the combination of increased production volumes in certain geographic areas as well as last year's first-quarter sales volumes which were unusually low due to ocean chartering delays resulting from rising freight markets.

Our Auto Parts Business continues to perform well and is also benefiting from the improved pricing for recycled metal. First-quarter 2005 operating income amounted to $7.4 million representing a 25 percent improvement over the first quarter of last year. A portion of the profit improvement was directly attributed to the three new Canadian stores but was also attributed to good income growth in our existing store base. Separately we recently announced the continued expansion of the Pick-n-Pull network with the acquisition of four stores located in St. Louis, Kansas City, Missouri; Columbus, Ohio and Virginia Beach, Virginia. The St. Louis, Kansas City and Columbus stores complement our three existing Midwest and the Virginia Beach store gives us a platform to begin to grow our East Coast presence.

The acquisition is expected to be accretive to earnings in fiscal 2005 and EVA positive. Also the addition of the four new stores will bring our store network to 30. We continue to believe that Pick-n-Pull's business provides us with tremendous growth opportunities than can be achieved by acquisition Greenfield store development in both new and existing markets and through organic growth opportunities within our existing store base.

Moving to our finished steel business, Cascade Steel reported excellent results for the first quarter of fiscal 2005. Operating income amounted to $12.8 million which compares to a modest operating loss reported in last year's first quarter. The higher margins were directly tied to higher selling prices that averaged $534 per ton.

Steel consumption remains strong and should remain so for the foreseeable future. However first-quarter sales volumes were unusually low at only 126,000 tons. This amount compares to 163,000 tons that were sold in last year's first quarter. The lower sales volumes were caused by fabricators and distributors intentionally deferring the purchases of new products as they lowered their inventories going into the slow winter months. As I mentioned earlier, steel consumption remains strong thus we anticipate new order demand to pick up as we approach the spring building season.

Partially offsetting the higher selling prices were increases in the cost for scrap metal and alloys. Looking ahead to the second quarter, we expect our operating results to be strong. However, normal seasonal slowdowns will temper our results but continue to remain well ahead of last year's operating performance. The fundamentals of our scrap metal business remains good.

Further, we continue to anticipate that consumption of both steel and scrap metal will remain strong throughout 2005; however, the supply of scrap metal will remain tight. Even with these good fundamentals we expect the pricing environment for recycled metals to remain volatile.

Our Auto Parts Business is expected to see its retail sales slow during the winter months as cold weather reduces demand. However, the wholesale side of this business should continue to benefit from the strong metal prices. The strong metals markets have been a bit of the 2-edged sword for our Auto Parts Business as the higher prices have grown our wholesale revenue but they have also resulted in significant increases in the cost to procure inventory.

As previously mentioned, steel consumption remains good but the combination of seasonal construction slowdowns and inventory balancing by fabricators and distributors are expected to result in relatively low second-quarter 2005 sales volumes for the Steel Manufacturing Business. Prices for the finished steel should remain well ahead of last year's average but modestly lower than our average for the first quarter.

As our press release mentioned, during December we installed a new furnace in our melt shop. The installation was completed as planned. Because of the production delays caused by the installation of a major piece of equipment we anticipate production costs will be abnormally high during the second quarter. Looking forward we believe the new furnace will be much more efficient than our previous equipment resulting in lower energy and repair and maintenance costs as well as modestly higher production volumes.

In summary, we estimate the Company's second-quarter 2005 operating income will be in the 50 to $56 million range which compares to 24.2 million reported in the second quarter of last year.

Many at you know in late November the Company filed its Form 10K with the SEC that included a couple of new disclosures that related to a sales practice the Company followed in the Far East and also information regarding differences and disputes with our joint venture partner, Hugo Neu Corporation. At this point, we have nothing new to report on either issue. Regarding the potential sale of Cascade Steel Rolling Mills we are continuing to work with our advisors, Bear Stearns but have nothing new to report on this matter either.

I will now ask Barry to make a few additional comments about other quarterly financial information.

Thank you, Bob. As some of you may have noticed that the Company's first quarter 2005 general and administrative expense increased by 2.8 million over the 2004 first quarter. This was due to a number of factors including higher expenses to comply with the Sarbanes-Oxley regulations, increases in professional fees, increases in headcount to manage our growth and increases in the Company's bonus accruals. Bonuses are directly tied to financial performance of the Company, thus the significant improvement in our first-quarter financial performance also led to increased bonus expenses.

As expected, the Company's first-quarter 2005 income tax rate was approximately 35 percent, which compares to 29 percent that was reported in the first quarter of fiscal 2004. Last year's first-quarter tax rate benefited from the utilization of certain NOL carryforwards that were acquired as part of an earlier acquisition. Because of the significant increase in the Company's profitability as well as other factors, the Company recognized the remaining tax benefits of these NOLs during last year's second fiscal quarter. Thus the current year's tax rate will no longer reflect these benefits. Looking forward into the second quarter, we anticipate that our tax rate will approximate 35 percent.

The Company's depreciation expense was $5.1 million for the first quarter of 2005, and we spent 7.5 million on capital expenditures during the quarter. The capital spending rate was intentionally front-end loaded going into fiscal 2005 in order for the Company to maximize certain tax benefits that are expiring at the end of calendar 2004.

Currently we are estimating the Company's fiscal 2005 capital expenditures to approximate $45 million. Most of this relates to the furnace replacement at our steel mill, installation of a new shredder and nonferrous downstream separator at our Oakland scrap yard, and overhaul and redeployment of the Portland scrap yard, and store upgrades in our Pick-n-Pull business. This amount excludes any spending for acquisitions.

Now I will hand the call back over to Bob who will make a few final comments.

Thank you Barry. In summary we are very pleased with the recent financial performance of our Company and its joint venture businesses. We continue to believe the market fundamentals (technical difficulty) and are looking forward to more good quarters ahead. Thank you for your time and your interest in Schnitzer Steel.

I will now open the call up to our listeners for a few questions. Thank you.

(OPERATOR INSTRUCTIONS) Ladies and gentlemen, before we take our first question, I'd like to turn the call back over to Mr. Philip.

One thing I would like to clarify in this morning's presentation I mentioned that the revenues increased at Schnitzer Steel last year by 65 percent. The revenues actually increased 55 percent over last year's first quarter. I just wanted to make a clarification. Thank you. Now I will take any questions.

John Rogers with D.A. Davidson.

Good morning. Congratulations on the quarter. A couple of things. First of all in terms of the scrap pricing just because you guys are able to look out in the export market a little further than others. What are you seeing out there over the next couple of month in terms a pricing and in terms of freight rates?

As you probably are aware and those listeners that are not aware, we sell scrap 90 days out. And we have pretty well sold our next 90 day's shipments. And we've seen prices level out over the last 60 days. And compared to the quarter that ended -- the first-quarter, our prices are up a little bit but our buying prices are also down from the first quarter. So our hope and expectation is that we will be able to maintain our margins which is how we manage our business.

Let me just throw out here one other comment as it relates to the market. Xinhua (ph) News, which is the Chinese news agency comparable to maybe the Dow Jones reported yesterday that they expect 2004 Chinese production to amount to around 270 million tons which will include using 59 million tons of scrap metal and out of the 59 million they are expecting to import around 10.2 million. They are also saying that for the year 2005 they expect steel production in China to ramp up to 325 million tons, using about 71 million tons and they expect their imports to increase to 11.5 million. This is good news because there has been so much discussion over the amount of steel being produced in China this year.

We are very optimistic that the Chinese production will continue as well as the Southeast Asian production. We've seen Vietnam as another potential market for scrap grow there, steel production in the year 2004 by 20 percent, to 5.8 million tons and are expecting an increase in 2005 of a similar amount. We are very bullish about the Asian demand for scrap and also the Asian demand for finished steel. We're not that concerned about an oversupply of steel being produced and then dumped or reshipped to the remainder of the world -- other countries.

Okay and Bob, one other question if I could. I know you don't want to or can't comment anything more on the joint venture disputes. But in the 10K you also said that you would not, and I think I have this right, would not be extending the line of credit for the JVs. Does that affect the way they will operate now in calendar '05?

No, it really doesn't affect the operation. If you will look back to the beginning of our joint venture agreement or when we began with the joint venture partner, neither party relied on a joint venture line of credit. We both have the capacity to use our current lines to fund any expenditures, any acquisitions or any operation that relates to the joint ventures. We are also very optimistic certainly about the future of the joint venture business because they are selling scrap into other markets other than Asia and have been enjoying good strength in their markets.

Great. Thank you.

Sou Ferrani (ph) with Goldman Sachs.

Fine. I just wanted to ask you a little bit on the relationship with HCN (ph). Mentioning the 10K that you are looking forward or trying to terminate that joint venture and I was just wondering if you monetized on that, would you be -- would your direction of investment -- further investment would be in the recycling business or would you rather go more towards the Pick-n-Pull business?

Both. As we announced 2 days ago we made an acquisition in the mid -- actually we bought a company based in the Midwest with four separate businesses in Virginia Beach, Virginia; Columbus, Ohio; St. Louis and Kansas City. And we are continuing to look at further expansion in the Midwest and on the East and Southeast for Pick-n-Pull and we're also very much involved in looking at acquisitions in the recycling industry. We are not limiting our growth to only one of those two segments.

What would generally be the lease be for these auto stores when you buy them?

What is the what?

How long is the lease on these?

On the property?

Yes.

They are very long term. We are not investing in these businesses as a real estate investment. We're looking at it as an auto parts operation and therefore we are securing very long-term leases in all of the stores that we don't own the property.

And one last thing. I just wanted to get some idea of sort of global and long-term outlook on the scrap. If you look at the production, steel production goes up 9 percent in 2004, we reach about a billion ton (indiscernible) right now. About 35 percent of the steel is produced, steel in the world to electric arc furnace which uses scrap and if we had another 5 or 6 percent growth, that's another 16 (ph) million tons of growth and about 20 million for scrap from there. How do you see scrap market going forward? Do you think it's going to stay tight for the next few years if this growth stays in this level?

We think so. I guess the question is how fast will some of the countries that are not producing steel using electric arc furnaces bring in new production. We are very optimistic about as I mentioned, Vietnam, certainly China is moving -- is going to increase their production. I think most of that production will not be electric arc furnace. But they will be increasing some electric arc production. We also see India beginning to increase their production.

What we lose sight of is that some of the older well-established companies, Korea, Japan, Taiwan, are also looking at boosting their electric arc production slightly in each country. That's why we are very committed to the recycling business and we really think that the demand for scrap is going to be very strong for the foreseeable future.

Thank you very much.

(OPERATOR INSTRUCTIONS) John Tumazos with Prudential.

Could you elaborate on the 23 percent volume decline in your Oregon steel operation shipments in the release you described is due to fabricator and distributor inventories? Do you think it's a one-time event? Wouldn't they have wanted to take more from you due to your scheduled outages pending? Are there arrivals of rebar from Asia that are swamping the market? Please talk to that circumstance and outlook.

First of all, let me correct -- the company I think you were referring to is Cascade Steel Rolling Mills, not the other company that you (multiple speakers).

I know you are not Oregon City, but Mill in Oregon.

I just wanted to make sure that there was no confusion there. We have not seen in our market a tremendous amount of import. True, there were some Japanese rebar shipments reported hitting the West Coast in December. We really didn't see that. I think maybe some of the fabricators felt that prices couldn't continue to go up and they were hoping to see some price reductions in certain steel products. I believe one of our competitors did reduce their steel prices within the last month. So maybe it is those that thought that steel prices couldn't continue to go up or right. And they bet on the right side of the equation.

We have seen -- we have heard from those customers that are bidding jobs that a lot of work being bid in California especially; it's very strong right now. One thing that we did mention is that we had an unusually large amount of rainfall in California. It's been known for some time that the El Nino effect would affect California. They've had a lot of rain in December. But the information from our sales group is that the demand for bidding of new projects remains quite strong and we're expecting a very strong spring building cycle.

So you expect this to right itself in your May quarter?

That is correct.

Do you think the raw materials markets are going to decline in sympathy to the excess finished inventories in your local area or do you think your local area is an aberration and Asia has its own good cycle?

I think Asia has its own good cycle. There is no question and the demand in Asia for finished steel really has I don't think much relation to the demand for finished steel in the United States today. Our business at the steel level is really West Coast oriented in we see strong economic expansion coming in California. We've seen at least in Oregon and Washington some signs of a turnaround albeit not a boom; there are forecasts that have said that the economies are improving.

We're fairly optimistic about both the flow of scrap and the flow of scrap I don't think has too much relation in our collection areas to the amount of steel being produced or the amount of steel being fabricated. Most of what we collect is obsolete scrap out of the fields (ph) building that are demolished, reclaimed buildings. And so our industrial base on the West Coast and even in the Northeast is not as strong as that which is in the Midwest.

Thank you.

(OPERATOR INSTRUCTIONS) Josephine Shea with Morgan Joseph.

Hi. I return again to Cascade and a volume question. It is not clear to me, was the volume lower than you previously expected and if so, by how much?

You are talking about the volume in the steel production business, not in the scrap business. Is that what you are referring to?

Correct.

We said that our first-quarter sales volumes were 126,000 tons compared to 163,000 tons in the first quarter of last year. That's at the steel mill. Our scrap volumes were very much similar to those of last year. Actually they were up.

But -- during the last quarter and the previous quarter your customers must have given you an indication. So last quarter you must have had some view on how much you were going to sell. I just get from the press release a feeling that it was lower than you had expected or was it actually in line with your thoughts for the last quarter?

What happens is you don't have nearly the line of sight in the steel business as you do in the scrap as we are selling ahead 90 days and steel we don't have -- they are not buying ahead that far. As a result they were -- our customers which were primarily the fabricators and distributors were buying ahead earlier in the year in anticipation of higher prices. And therefore in the first quarter they reduced their buying to (technical difficulty) companies. We anticipate that they will be coming and back and by the end of our fiscal year we ought to have normal kind of selling volume levels. And we just think it's just a temporary shift as they rebalance their own inventories.

Thank you.

One thing, remember last year in our first quarter our steel mill basically broke even and this year we had a pretty sizable contribution. The other thing to remember also is that our major contributors to our bottom line have really been the scrap business and our Auto Parts Business. They will continue to significantly lead the steel mill in contribution. But we are optimistic that this year steel prices will stay firm and that our volumes will be similar to what we achieved last year.

Thanks.

John Rogers with D.A. Davidson.

Just a follow up. One more question on the steel side. With the closure or the replacement of the furnace in December, do you still expect to be profitable at the steel mill in the February quarter?

Yes. By the way the steel mill is operating completely at normal levels today. We started the furnace at our plan indicated December 31 and we're seeing much better results than we even anticipated as a result of the new furnace and the efficiencies that will be achieved.

And did the replacement, Bob, did it significantly impact your sales volume? In other words, did you build billets or inventory ahead of it?

We had billets built ahead of it and our sales volume really wasn't affected at all.

Okay. And then secondly just on the Auto Parts Business, I know you talked about for a while about expanding it and seeing other opportunities, can you give us a sense of what your pipeline looks like in terms of acquisition potentials out there?

There are many of them out there, that's all I can tell you that fit our criteria.

Okay. And when you said that it would be EVA positive, what are you using as a cost of capital there?

We're a little over 9 percent.

Okay. This is good. I saw on the 8-K that you had to release the price of this. So, okay. Thank you.

There are no more calls. This concludes the conference for Schnitzer Steel. Thank you for your participation and you may now disconnect.