Radius Recycling Inc (RDUS) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Schnitzer Steel's fourth-quarter fiscal 2005 earnings conference call. My name is Bill, and I will be your conference call facilitator 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 quarterly report on Form 10-Q.

At this time, for opening remarks and introductions, I would like to turn the call over to President and Chief Executive Officer of Schnitzer Steel, Mr. John Carter.

Thank you, and good morning. Welcome to Schnitzer Steel Industries' 2005 fourth-quarter and annual earnings webcast and conference call. I am joined on the call today by Ken Novak, our Chairman; Greg Witherspoon, our CFO; and Kelly Lang, Vice President of Asset Integration. After a few and introductory remarks, we will be available to answer your questions.

First, I would like to ask our Chairman, Ken Novack, to comment on these Hugo Neu transaction we closed at the end of September. Ken?

Thank you, John. Just as we close our first 100 years in operation, I would like to highlight a milestone in our Company's history. As you are aware, this week, we completed the separation of our joint ventures with Hugo Neu Corp. As a result, we began operating export facilities in New England and Hawaii and a global trading business sourcing scrap in Russia and the Baltic region.

We would like to take this opportunity to thank John Neu, the rest of the Hugo Neu team, and the joint venture personnel for their hard work in helping us build the many joint venture businesses. I would also like to wish John Neu and his team the best of luck going forward. In addition, we all want to welcome the people at PNE, MRL, Hawaii, and our new global exchange business to the Schnitzer family. Now, I'd like to return the call to John Carter to discuss the fourth-quarter and fiscal year results.

Thanks, Ken. Today, we reported our results for the fourth quarter and for the full year. Before we discuss the quarter, let me recap the 2005 fiscal year. It was a good one.

We reported record revenues and earnings in all of our business segments. For the Company as a whole, net income was 32% higher than in 2004. As Ken mentioned, we reached an agreement to separate our Hugo Neu joint ventures in the Metals Recycling Business. We also reached a significant new three-year agreement with our steel workers union which incentivizes productivity gains in our steel business. We have continued expansion of our self-service auto parts business, increasing the number of stores from 26 to 30. We significantly strengthened our management team and made investments in our human resources.

As the year ended, we entered into two significant acquisition agreements. The first was with Greenleaf, which will expand our auto parts business. And the second was with Regional Recycling, which will allow us to expand our Metals Recycling Business into a Southern footprints -- more on that later.

Let me not talk about our performance for the fourth quarter. We continued to benefit from a number of fundamental trends which we believe are long-term and positive for our markets. We continued to see good demand for our recycled metal and steel products, both domestically and internationally. Our Metals Recycling Business had another strong quarter. As we told you on our last earnings conference call, we expected to see a seasonal decline in pricing and a reduction in the fourth-quarter sales volumes. Current scrap prices, in fact, averaged $211 per ton. This was down from the average of the third quarter, but higher than last year's fourth quarter.

Our shipments for the quarter were off slightly from last year, due primarily to the timing of export sales and lower inventory levels at the beginning of the quarter, rather than the expected seasonal decline in our market. However, for the full year, ferrous scrap volumes were actually slightly above last year's volumes, and totaled 1.9 million ferrous tons.

Despite the lower sales volume for the quarter, our margins remained strong at nearly $54 per ton, which was well above the fourth quarter of last year, and about flat with this year's third quarter. We continue to focus on the export markets. Our wholly-owned export sales volumes were spread (ph) fairly evenly between Korea and China.

Turning to our joint venture operations in the fourth quarter, profits and sales volumes were up. The timing of export shipments played a role in the change in volume, as did a decision to reduce inventories, helping to facilitate the separation of the joint ventures with Hugo Neu. This decision combined with generally softer market conditions resulted in lower average selling prices, which offset the increased sales volumes.

During the fourth quarter, the joint ventures international trading business had volumes roughly comparable to the fourth quarter of last year. This business returned to profitability for the quarter and had good performance for the full year.

Now, let's move to our auto parts business. We continued to see the operating profit benefit of the additional four stores acquired earlier in the year. However, as noted in our last earnings call, declining scrap prices had a compounding effect -- first, revenues in the sale of crushed auto bodies were down; second, margins were compressed, as most of our inventory was purchased before scrap prices began to decline. Although operating margins were lower at 22.4%, they remain attractive, which is why we are committed to expanding this segment of our business.

Turning to our steel business, our mill in Oregon continued to see strong demand for its steel products. At (indiscernible) our last earnings call, we were seeing a slight decline of prices as the west coast steelmakers reacted to protect market share from imports. Thus (ph), selling prices for the quarter declined from the average prices recorded in last year's fourth quarter and this year's third quarter.

We are currently seeing finished steel prices headed in a positive direction. Fourth-quarter volumes were higher than our previous expectations, primarily due to an acceleration of customer orders in advance of price increases that took effect in September of this year. As I noted earlier, we recently reached agreement on a new three-year labor agreement with the steel workers union that carries us into 2008. For the first time, we've been able to include economic incentives in the contract for our workers to improve productivity at the mill. While it's still too early to draw definitive conclusions, initially, we're seeing measurable increases in output. We would like to congratulate the management team at Cascade and the union for the foresight to recognize the win-win nature of this arrangement.

Now, let me turn the call over to Greg Witherspoon to go over a few financial details for the quarter.

Thank you, John. I would like to start by reiterating that the Company had a very good year, and all three of our divisions had record revenues and earnings. Earnings per share for the Company on a consolidated basis were up 32% to $4.72 a share from $3.58 per share last year on a fully diluted basis. With the recent separation of our Hugo Neu joint ventures, we will begin including 100% of results of the New England, Hawaii, and international trading businesses within our metals recycling segment.

Conversely, our share of the profitability from the other Hugo Neu joint venture entities will no longer be included in our results. We would like to provide some information to show how those entities would have roughly impacted our results had they been reported in a similar manner in our 2005 financial statements. It is important to note that this information is unaudited, and assumes the results of the acquired entities would not have changed as a result of Schnitzer's management or other factors.

Our operating income for the year as reported was approximately $233 million. Comparatively, removing the joint venture earnings and adding back 100% of the entities we acquired as part of the separation, operating income would have been in the range of 200 to $210 million. Our sales volume basis in New England and Hawaii operations would have added 1.2 million ferrous tons to our historically wholly-owned processing ferrous sales volume of 1.9 million tons that was reported in fiscal 2005. The Russian/Baltic trading business would have added another 1.2 million tons.

As a reminder, our goal in separating the joint venture assets was to provide both partners with a business that provides similar historical financial performance. The assets we received as part of the separation have not recently performed at the same level as the assets Hugo Neu received for various reasons. We are, however, pleased with the assets we received, and are confident these businesses will perform well in the years ahead.

Now turning to the results of our wholly owned operations. The Company's depreciation expense for the quarter was 5.3 million compared to capital expenditures of 7.5 million. For the full year, depreciation expense was 20.9 million and capital expenditures were 48.3 million. We are pleased that our strong cash flows have enabled us to aggressively invest for the future. We expect we will be able to continue the reinvestments at the same or higher levels in 2006.

Our fourth-quarter tax rate was 34.3% and for the full year, the rate was 35.3%. For the year 2006, we expect tax rate to be approximately 36%. This is higher than the rate in both 2004 and 2005, primarily because of the phaseout of the oldest FISC credit that benefited export sales. However, we are still awaiting guidance from the IRS regarding the qualified production activity reduction which was part of the 2004 Tax Act passed by Congress. That guidance could have a positive impact on this estimate.

Fourth-quarter SG&A expense was 16 million, 2.7 million higher than the same period in 2004. This increase was primarily due to higher professional fees for the Far East investigation and SOX compliance, and increased expenses-related acquisition and integration activities. Additionally, higher advertising expenses at our Auto Parts Business due to the four stores we added in January 2005.

In the fourth quarter, we recorded net environmental charges of $3.7 million. This is primarily related to the additional cost of the cleanup of the Hylebos Waterway adjacent to our Tacoma, Washington facility.

Finally, as of the end of the fiscal year, our cash balances were 20.6 million compared to only 7.7 million of outstanding debt. That said, I would like to point out that, after receiving the initial cash proceeds from the closing of the joint venture separation agreement and the payment for the acquisition of Greenleaf, our cash balances are around $30 million. John, I'll now turn the call back to you.

Thanks, Greg. Let's talk about our 2006 outlook. Let me start by repeating a point I made on our last call. Market conditions in all our business segments remain strong, and the long-term fundamentals are favorable. As we've said before, we expect the steel and metals recycling business to remain cyclical, but we believe these markets are being lifted by a number of positive long-term fundamental trends.

What are we doing to take long-term advantage of these positive conditions? First, we are continuing to make significant investments in our infrastructure to become even more efficient and to maximize margins throughout the business cycle. Second, we are continuing to use our strong balance sheet and management resources to make long term value creating acquisitions in the metals recycling and Auto Parts segments of our business. Finally, we are making important investments in strengthening our human capital and adding to our management team.

2005 was a great year. How will 2006 compare? We expect 2006 to be a good year, and we continue to see strong fundamentals in all of our market segments. And 2006 also be a year where we make significant investments for the long-term health of the Company. These investments are expected to provide benefits for many years to come, but will have near-term impact on our operational results.

We are continuing and expanding upon our significant capital improvement plan that will install state-of-the-art mega-shredders at our Oakland, Portland, and Boston-area facilities, and a new electric motor at our Rhode Island facilities. These projects will result in temporary disruptions of our operations in those locations. However, they will substantially increase our processing capacity when they come back online; improve operational efficiency; improve our product, producing a better-quality shredded product; and reduce energy consumption. When completed, the Company's operations will be substantially improved, both in terms of volume and quality.

We have made and are expected to complete acquisitions which will provide us growth opportunities, such as Greenleaf, Regional Recycling, and the Hugo Neu separation. The Hugo Neu transaction is a particular example of an investment that benefits the Company in the long run. As with any acquisition, there will be near-term disruptions. As a result of higher fourth-quarter sales volumes, we will begin fiscal 2006 with low inventories in our New England and Hawaii scrapyards, both part of our new acquisitions from the separation. These operations will be negatively impacted by the lower starting inventory levels during the first quarter.

It's also worth mentioning that accounting rules will temporarily dampen margins when the business is received as part of the joint venture separation. In a nutshell, purchase accounting requires us to step up the basis in the inventory remaining at the time of the closing. When the inventory is sold, the revised higher cost of the inventory will result in artificially lower margins. As I said, the impact is expected to be temporary. But it will be felt in our first quarter.

In addition to the expansion of our wholly owned operations discussed already, we also expect to complete an additional acquisition that will add to our Metals Recycling Business. Shortly after the year ended, we announced our intent to purchase Regional Recycling, a scrap processing business with 10 facilities and Alabama and Georgia. This acquisition will give us a solid franchise in the Southeast, an area where we have not previously had operations, and it has good fundamentals and a solid management team with which we can work.

Finally, let's turn to people. Not only are we working to smooth the integration of these new acquisitions, we've been fortunate to be able to build upon an already strong management team and add significant strength to the team past (ph) performing this integration. We've added depth and industry experience to our operational team, and we've added some key players to our financial team.

Turning to the Auto Parts Business, we will expect a continued impact on the final runoff of high-cost inventory purchased before the recent drop in scrap prices. We expect this to be offset by seasonally stronger fall retail sales and a favorable market for wholesale revenues. As a result, we expect a slight increase in first-quarter margins for our self-service stores over the recently completed fourth quarter, and we should also began to see modest improvements in the same-store retail sales as a result of new marketing initiatives put in place in the last few months.

Last week, we closed on the acquisition of Greenleaf Auto Recyclers. How does this operation fit into our business model? First, it gives us a foothold in several key strategic markets. It opens the door for potential vertical integration with our metals recycling operations. And it allows us to leverage the proprietary technology systems and other resources of our self-service business at the Greenleaf locations.

Second, we believe a full-service used parts operation is an appropriate extension of our self-service model, and presents a potential opportunity for continued expansion in an attractive and synergistic business segment. This does not mean that we are shifting our focus away from the self-service markets. The mechanic trade (ph) self-service, under our Pick-N-Pull name, remains a priority in our expansion plans.

While some businesses in the full-service sector have struggled, our vision for this market is different. We believe by focusing on what has made us successful in the self-service sector -- managing inventory, leveraging standardized processes, centralizing management, and utilizing technology -- and then applying these concepts to newer automobiles, we can be as successful in this part of the used parts business as well.

We also believe there is potential opportunity to be part of the solution, as auto manufacturers turn to the problem of managing the lifecycle of manufactured automobiles. We expect the assets acquired in the Greenleaf transaction to be diluted (ph) into the Auto Parts Business's earnings for the quarter and for the full year until the integration of restructuring process in this business can be completed. We intend to devote significant resources to this integration to ensure we achieve the benefits of the acquisition as quickly as possible.

Now let's move to our Steel Manufacturing Business. West coast consumption of long steel products continues to remain strong and the west coast manufacturers continue to produce at or near capacity. As a result, the Company announced price increases for re-bar and merchant bar products in both September and October. Overall, average prices for the first quarter should be slightly higher than the recently completed fourth quarter.

2006 will be Schnitzer's 100th year in existence. And we'll be talking more about this as the year progresses. We start our second century buoyed by a positive outlook. We just finished a great year. We are investing for the future by acquiring businesses that fit our strategic plan, and modernizing our infrastructure. We have strengthened our management team and we look forward to the future with great optimism. With that, Ken and I and the rest of our team will now take your questions.

(OPERATOR INSTRUCTIONS). John Rogers, D.A. Davidson.

Just a couple of questions -- first of all, on the southern metals recycling business, that transaction is expected to close -- did you say in October?

Yes, John, we expect to close that by the end of the month.

Okay. And John, you talked about some of the dilution from your other acquisitions. What's your feeling on Regional Recycling as that comes in?

Well, we think Regional will be a good acquisition for us. And it will be a positive effect on our earnings. We have made the point that out of the separation with Hugo Neu, we get a substantial amount of cash. And we're putting it to work. And that will offset some of the other things we mentioned -- the dilutive effects substantially or completely during 2006.

Okay. And then on the Auto Parts Business relative to Greenleaf, it's probably very early, but are you seeing more car bodies show up in those markets?

Is that a question related to Katrina and the --

Yes.

Yes, it's an interesting question. I think probably the anticipation is that there will be more autobodies. The estimates that you've seen in the papers are quite substantial as to how many cars are damaged. It's not clear to us how many of those will actually show up in the recycling side. I've seen some news stories recently about some of those cars showing up in markets in the Northeast and here in the Northwest as being rehabbed cars. I think that just temporarily diverts them from the scrap markets.

Okay.

But our expectation is one of these things will happen out of Katrina is that there will be a temporary increase in supply of car bodies in scrap market, but probably not much else in terms of major impact on the scrap markets.

Okay. And then last thing, if I could -- in terms of your export sales of scrap, how far out are you sold now, and what are you seeing in those -- two and three months out in terms of pricing compared to where we are right now?

Well, we're pretty much sold out for the quarter. The trend at the moment is, as always, a little hard to read and predict. You saw a spike right after the hurricanes, both in the domestic and, coincidentally, in the international markets. There's a little softness in those markets today because I think both the buyers and the sellers are waiting each other out to see what the effects of some of the reports on Chinese steel production will have on the markets. But fundamentally, the pricing is still quite good, even at the levels that are being indicated in the market. And we're being a little cautious about which way we see this market go at this (ph) second (ph) time, but we see nothing to say that it won't strengthen again.

Okay. Great. Thank you, and congratulations on the year.

(OPERATOR INSTRUCTIONS). John Debs, Bodri Capital Management.

A couple of questions. Can you update us on the -- as you mentioned, the investigations? I guess it's mainly Korea.

Yes, I think I'll ask Chairman Ken Novack to address that.

We really don't have anything to add from our last 8-Ks on the subject. It's still pending and we're still working on it.

I think the main thing, John, is that we continue to cooperate fully with that investigation, both at the SEC and the Department of Justice. And it just takes its course. We aren't in a position to speculate on timing progress or likely outcome.

Okay. Can you give us some sense on your export scrap markets? Is it mainly Korea now? Is it China? Is it India? What are you seeing in terms of different countries' demand in the scrap market?

Well, one of the things that is, again, a result of the separation of the assets of Hugo Neu is it gives us directly a view on the export markets much more broadly than simply the Asian markets we were serving primarily before. So we're seeing demand and actively participate in the markets that include most, if not all, of those you just mentioned. So we'll be looking closely to see where the variations are in the current pricing for sales and take advantage of those. Turkey has been a very strong market. It has recently seen some backing off on the prices. And then India has been stronger. So we're watching quite closely, and it's an interesting dynamic.

So you're not just trying to depend it (ph) in terms of --

No, not all. In fact, one of the things that -- if you spend some time in these markets, as you do, I'm sure, you notice that you can have pretty substantial variations, even on a daily basis, in those markets, which is really why, as we have said before in some of our objectives for the future, we are trying to be a participant in a broader spectrum of markets -- more countries, and actually more customers within the same country, because it is a commodities markets, but that doesn't mean that all of the sales are at the same price.

Okay. In this acquisition that you have announced from Ford (ph) Motor, how many locations are there? And I was a little lost in your commentary. Are you going to convert them to self-service or are you going to leave them in their current mode?

I think I'm going to ask Kelly to answer that question for you, if you would, Kelly.

Sure. Great question. Our plan is right now is -- we first of all looked at that asset, and we viewed it as a real opportunity to expand our self-service model or our self-service footprint that we have today. As you know, we have 30 stores, and we -- place range (ph) from Sacramento to Virginia Beach, Virginia to Calgary. And we have a little bit down in Texas. The Greenleaf operation has some very nice -- a nice footprint, particularly in the Southwest and Texas principally; also down in kind of the Florida Panhandle area and the Southeast, which, again, just coincidentally, fits in nicely with our regional acquisition. And then secondly, we have a nice business, particularly up in the New England area -- again, that just coincidentally fits in with our separation with Hugo Neu.

So I think that first of all, what we really bought there were access to great locations is the first thing. But secondly, we anticipate converting a number either to fully to self-service, where we'll do kind of a mix of self-service and full-service with separate storefronts, because they really do serve two different markets. But what we really see is there are some nice -- there's a real core of good full-service business as well. So there will be a bit of a mix, but I think a real key point here is that we are not taking our eye off the ball in growing that self-service business. Anything else to add, John?

No, I think the point is we are restructuring that business. And the result of it will be a significant number of self-service locations.

And I can't remember the release -- did you say what the revenues were in that business?

We didn't. I think that the main point, John, is we look at this purchase as a purchase of assets. We're not purchasing a business or a business model.

So basically it's significantly increasing your footprint in this business?

Yes, is also a good deal for us in terms of -- we know what it costs us to go open these stores, to outfit them and put the capital investment in. And we're quite comfortable that we got a very good look at these, and they are cheaper for us to do it this way.

And finally in your steel plant, I know we worked at -- I guess, last winter. And now you say you have the new labor contracts. Is that going to give you the opportunity to increase margins long-term in that facility?

Well, margins in that business of course are controlled by a number of factors, including imports and the price leadership of other firms in this country. We don't exercise a lot of price leadership. But we think on the efficiency side, yes, we should perform better in equal markets than we have before, because of not only the investments in the capital, but also we're pretty pleased with this new contract with the unions and think it is going to align interest in a way that we haven't quite been able to do in the past.

Finally, is there -- do you have any idea when the Schnitzer family might be below 20% of ownership so you don't have to show those as insider sales going forward?

I am going to turn that one over to our Chairman.

The answer is when they sell 50% more of the stock.

So you're at 26 now?

I think that is the right number, yes.

That is an approximate number, obviously -- you know (multiple speakers)

I haven't checked it recently, but it is in that range. And those are all individuals. And there is no really accurate way to predict that.

(OPERATOR INSTRUCTIONS). John Rogers, D.A. Davidson.

I know you said this, and I apologize that I didn't catch it, but your cost of the ongoing investigations -- what was it for the quarter in the year?

Yes, let me turn that one over to our CFO, Greg.

I don't have those exact numbers. I know that the SG&A was up about $2.5 million for the quarter related to professional fees -- I'm sorry; it was about $4 million year to date. But all of that doesn't involve the investigation. There are other professional fees involved in that also. But we don't segregate it just for the investigation.

Okay, but presumably, then, a significant portion of that $4 million for the full year would be related to that?

That is correct.

Okay. And then, Greg, when will you file the 10-K?

On or before November 14.

Okay, do you have to complete the investigation to file it?

No, we do not.

Okay, and there are no other significant hurdles there?

There is a lot of work left. But no, there is nothing else I can think of.

(OPERATOR INSTRUCTIONS). At this time, we have no further questions. I'd like to turn our call back over to Mr. John Carter for any closing remarks he may have.

Thank you very much for being with us today. We appreciate your participation in the call. And it's nice to be able to report on a great year. Thank you.

Thank you very much, sir. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.