Radius Recycling Inc (RDUS) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Schnitzer Steel third-quarter fiscal 2006 earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

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 security laws, 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 this call over to President and Chief Executive Officer for Schnitzer Steel Industries, Mr. John Carter.

Thank you and good morning. Welcome to Schnitzer Steel Industries' 2006 third-quarter earnings webcast and conference call. I'm joined on the call this morning by Greg Witherspoon, our CFO. After a few introductory remarks, we will be available to answer your questions. All of our businesses continued to benefit from a number of positive long-term trends. Our focus remains on ensuring we take maximum advantage of these trends by managing those operating factors within our control. Third quarter performance in all three divisions, Steel Manufacturing, Metals Recycling and Auto Parts was improved over the second quarter.

Our Steel Manufacturing Business reported its third consecutive quarter of record operating earnings. Our Auto Parts Business performed in line with our expectations. Any integration of our GreenLeaf full service business continued according to plan. Results in the Metals Recycling Business improved significantly.

Let me start with the Steel Manufacturing business. We have been operating in solid markets and have been taking steps to make the most of the current environment. One of the things we have done is to increase the metal shop production and finished product throughput at the mill, which allows us to improve our customer service by increasing both the amount and mix of product available for sale.

In order to achieve the additional volume [for the] product and to help us respond to the market demand, we added extra shifts. The benefit from responding to the demand more than offset the additional cost of increasing production. We continue to see the benefits of our alliance with the union at the mill, both in terms of productivity and the effects on our safety record.

I'd like to take a moment to congratulate the team at the mill for their renewed focus on safety in the workplace. At one point this spring the mill had gone nearly nine months without a lost time accident. This focus on safety creates a better work environment for our employees. It also contributes to improved productivity.

Sales volumes traditionally increase heading into the peak construction season, resulting in higher historical third-quarter volumes. Thus we had anticipated a slight increase in volume over the unusually strong second quarter. In fact, volumes increased more than 15%, reflecting the continuing strength of the West Coast markets and the ability of the team at the mill to increase production to meet demand.

As expected, selling prices remained high and approximated second-quarter levels despite a noticeable increase in imports. As a result of the strong market condition and productivity improvements, the operating earnings for the quarter set yet another record.

In our Auto Parts Business, the GreenLeaf integration is going well. We're seeing expected improvements from our plan to close or convert underperforming full service sites and to increase the investment in inventory of the remaining locations. Primarily as a result of these actions, the full service operation posted an operating profit for the third-quarter.

The planned full service to self-service conversion process, which is underway in the affected stores, has been more expensive and has taken a little longer than originally planned because we've modified our approach to these conversions. We've adjusted the business model for the new self-service locations including more upscale storefronts to better reflect the demographics of these markets. We believe these changes will lead to improved results at the new stores.

During the quarter, full service operations in Tallahassee and the Chicago-area were shut down in preparation for conversion to self-service, bringing to four the number of sites which have been closed, two of which were shut down permanently. The self-service operation showed expected quarter over quarter seasonal improvement in retail sales.

We also experienced higher core and scrap revenues due to the impact increasing scrap prices. On a year-over-year basis, we continued to see higher core sales per car purchased as a result of greater focus on removing high-value parts before shredding the car. We did not, however, see our desired year-over-year growth in same-store retail sales for reasons including lower levels of car purchases and less inventory available for sale.

We've adjusted our buying practices to take into account higher value of certain makes and models. And as a result, the flow of inventory in our yards has increased. The cost of acquiring scrap cars remains higher than the comparable periods last year, as the Company continues to see significant competition for the purchase of auto bodies in all markets in which operates.

Now, let's turn to the Metals Recycling Business where we are very encouraged by the results. During the quarter, we saw a substantial improvement in operating income even with shipping volume slightly lower than anticipated. We shipped 886,000 tons, not including 80,000 tons which were delayed in the first week of the fourth quarter. The flow of material into our yards continues to be strong at all our facilities, and a strong operating performance during the quarter meant we processed record amounts of materials.

As expected, sales volumes in the Global Trading Business increased, more than doubling from the second quarter as higher prices and warmer weather improved the flow of material out of Russia and the Baltic Sea region. We continued our focus on diversifying and expanding our customer base and utilizing our geographic presence on both coasts to [access] markets efficiently.

We made sales to 10 different countries would Egypt, Turkey, Taiwan, and India representing 75% of our [processing] export sales volumes. Although China and Korea together made up only 10% of our export sales, customers in these importing countries have recently reentered the market. All shipments to Eastern Asia were made out of our West Coast operations and all statements to the Middle East and Mexico out of the East Coast, which minimized our shipping costs.

We continue to work on improving our operations and we saw our conversion costs decline partly as a result of increased volumes. Installation of the new mega shredder later this calendar year and other capital improvements at work are expected to help these costs improve even further.

During the quarter, worldwide demand for ferrous scrap strengthened, and average net sales prices for the processing operations rose to $210 per ton. Average net prices in the training business were slightly higher.

During the third quarter, prices for export and domestic ferrous scrap were more consistent with historical market conditions, with export prices as good or higher than domestic prices. On a consolidated basis, acquisition cost for materials rose at approximately the same rate as export prices, stemming the margin squeeze that took place in the prior quarter when buying prices rose more quickly. More importantly, in the Northeast, the rise in export prices was greater than rise in acquisition cost, which allowed that operation to expand its margins.

In this quarter, we saw a material benefit from the non-ferrous side of the business. Sales prices for non-ferrous materials increased 23% from the second quarter to $0.91 per pound. That's about $1800 per ton. During the quarter, we also increased our sales volumes by nearly 20 million pounds.

A good part of the increase in non-ferrous volume is due to the onetime impacts of reducing the backlog of materials which had built up in our Northeast operation, and a change in how we contract for our non-ferrous shipments. Part of the increase is also a result of higher non-ferrous volumes and higher extraction of non-ferrous materials from ferrous processing activities.

We had a strong quarter, most of which was a result of focusing on the things we could control. Management continues to direct its attention to a few key areas which will allow us to continue to capitalize on positive market trends. Let me take a few minutes to discuss those areas.

First, we're focus on achieving the lowest possible operating costs. Even though we can't control the markets, we can manage what it costs us to process our products whether it's steel, scrap metal, or auto parts. It is a straightforward proposition that by lowering our processing costs, we become more competitive in all market conditions, good or bad, and maximize our financial returns.

To this end, we continue to make significant improvements and investments in capital projects, from new mega shredders which lower costs while increasing capacity, to new sorting systems which improve the recovery of high value non-ferrous materials and improve the quality of our ferrous scrap. To new [bundlers] and improved logistics and our melt shop which increased steel making capacity at the mill. We believe with these investments and an experienced management team focus on operational improvements, we're taking big steps toward ensuring that we remain competitive in all of our businesses.

Second, we remain focused on integrating acquisitions. As we have discussed before, we are working to leverage economies of scale on a larger operation through a sound integration of our recent acquisition. We've already made substantial progress.

In the GreenLeaf acquisition, we are exceeding our integration objectives. The Regional Recycling operation in the Southeast has been seamlessly integrated into our Metals Recycling Business, and we've been able to take advantage of the positive markets they serve, particularly in the non-ferrous areas. The strong management team we acquired with Regional is performing well.

Our Northeast operations are now operating as a single entity and barriers to achieving synergies have been removed. We've put in place an expanded sales infrastructure and transitioned to full control over our sales Company-wide. And we are on target for the installation of a common IT platform for critical business systems. We believe our ability to integrate our large acquisitions that capture the related benefits gives us confidence that we can successfully handle future opportunities as they arise.

Third, we're seeking to maximize the value of the vertical integration of our business. In the past, while there were business relationships between each of our operating units, each business operated independently. We may not have fully captured the benefits of vertical integration. We're changing that mind set. We now have closer communication and coordinated efforts among all of our businesses.

During the quarter, we increased the percentage of auto bodies from our self-service yards which are going to our own shredders. And the two businesses are jointly focused on increasing the efficiency with which we extract the value of non-ferrous scrap. The Metals Recycling Business and our steel mill are working together to develop a scrap product which improves the yield from the melt shop, and we're taking a coordinated approach to evaluating strategic opportunity.

Lastly, we're also focused on maximizing our inventory turns and increasing our processing volumes. We believe higher volumes and greater inventory turn velocity are critical factors for all our business units and lowering costs and maximizing the value of our capital investments. While the mega shredders, for example, provide cost-saving benefits with no increase in throughput, there's a great deal of leverage to be achieved in increasing the volume of material processed by this equipment. The incremental costs go down.

In the Auto Parts Business, by increasing the velocity of which we turn over our scrap cars, we accelerate the rate at which we recognize the benefits from high-value parts and provide our customers with a higher quality selection of parts inventory from which to choose. More rapid turnover also reduces working capital, which creates cash flow for other uses.

Now, before I turn the call over to Greg Witherspoon, let me discuss the status of the SEC and Department of Justice investigations into our past payment practices in Asia. During the third quarter, the Company determined the monetary component of the settlement would be at the high end of the $11 million to $15 million range previously disclosed. As a result, we accrued an additional reserve of $4 million pending finalization of the settlement, and we look forward to wrapping up the investigation in the near future. Greg has a few comments about the financial details for this quarter.

Thanks John. Let me start by providing more details on a number of financial items included in this quarter's results. First of all, we're in the process of filing Amended Form 10-QA for the first and second quarter of fiscal 2006. The amended filing restates the first quarter and second quarter year-to-date statement of operating results for a change in interpretation of application of ARB 51 for the acquisition of the assets of Regional Recycling, the purchase of GreenLeaf Auto Recyclers, and Hawaii Metals Recycling.

The restatement involves a reclassification of topline revenues, cost of sales, and pre-tax operating income. It does not impact previously reported net income or earnings per share. A summary of the expected changes were detailed in our 8-K filings of June 23rd.

Thanks Greg. I'd like take a minute to talk about our outlook for our business. In the Steel Manufacturing Business, customer demand for finished steel [lawn] products remains strong and customer inventories remain low. Fourth quarter sales volumes are expected to approximate the robustly high volume shipped in the third quarter of this year. Based on current market conditions, the Company expects average prices for steel product shipped in fourth quarter to remain high and could rise $10 to $20 from the third quarter.

While the level of imports has been a concern in the past, import prices have been rising as well and appear to be less of a near-term risk in our markets. In the Auto Parts Business, the self-service revenues are expected to increase for both the third quarter of this year and fourth quarter of '05, as we see the impact of four stores converted from full service operations to our self-service model. Two of those stores are fourth quarter additions, one of which opened last week. Full service revenues are expected to modestly improve from the third quarter.

Overall margins in the Auto Parts Business are expected to be slightly improved [for] third quarter results due to higher self-service in-store retail sales and improved full service results. The results from the stores converted from full service to self-service will be improved from the second quarter. These stores, while expected to add revenues, will continue to be a drag on earnings until such time as all the conversions are completed and the stores have established a foothold in their markets.

The GreenLeaf operation is expected to turn another modest profit in the fourth quarter and we continue to expect longer-term it will add meaningful revenues [and] profitability to the Auto Parts segment. On a year-over-year basis, the lower margin full service business and higher purchase cost for self-service inventory are expected to result in margins which will be lower than the fourth quarter of 2005.

In the Metals Recycling Business, fourth quarter ferrous sales volume at our processing facility should also be up from volumes in the third quarter, at approximately 950,000 and 1 million tons. Depending on [obtaining] the shipments toward the end of the quarter, this range could increase. Non-ferrous volumes are expected to approximate 75 to 80 million pounds, about 40,000 tons.

Volumes in our Global Trading Business are expected to be in the 400,000 to 450,000 ton range. Based on sales booked to date and our current view of the market, we believe average ferrous net selling prices for our processing business will increase approximately 10 to 15% from the third quarter. Non-ferrous prices are expected to be slightly higher than third quarter averages, but remain volatile. Prices in the Global Trading Business should approximate prices received in our processing business.

Purchase prices for raw materials are expected to remain under pressure and may potentially rise at a slower rate than the rise in export selling prices. We have made substantial progress, completing the transformation we began earlier this year by integrating our recent acquisitions, making the capital improvements necessary to improve our competitiveness and market conditions in our business continue to point toward strong financial results. The fundamentals supporting our businesses remain positive, and we believe we're taking the right steps to capture the benefits and to maximize the value we provide for our shareholders. I would now like to open up the call for questions. Thank you very much.

(OPERATOR INSTRUCTIONS). John Rogers, DA Davidson.

A couple of things. First of all, on the Auto Parts Business, I just want to make sure I understand what you're saying. When you talk about margins there, John, are you talking about percentages or absolute?

We are talking about a little of both, but it's on a percentage margin basis that we usually look at it.

Okay. I just wanted to be clear because when you said the -- higher in the fourth quarter but below prior year levels, I just -- I assume that there you are talking about percentages.

That's true John.

That's correct.

Okay. Just for clarification. And I guess more importantly though, on the Auto Parts Business, are you seeing more opportunities for acquisitions there? I know you've been in the hunt looking, but it's been somewhat quiet.

We do see more opportunities, but as you know, that's a very local business and there are very few large-scale opportunities for acquisitions there. We continue to look for those. We have identified some interesting opportunities, but as you know, it's been a good business in the last couple of years. And expectations on the part of sellers are substantially higher, so we're making sure that we see things that look attractive to us.

Okay. And in terms of the scrap business, the shredders that are being installed, most of the impact on volume is that -- at this point looks like it will be more into the fall?

I think we said we expect those shredders to be installed in the calendar year, not in our fiscal year. And so the volume impact of those shredders will depend in each case Portland, Everett, and Oakland, when those shredders are actually up and running and the volume of material is seen through the operation itself. So the actual volume capacity for the shredders will not be seen until the last quarter of the calendar year.

Okay. And any delays in shipments as you start those shredders up? And I know in some cases, I think in Oakland you have to stockpile product or can't accept as much. That's more of a first quarter fiscal '07 impact?

That would be right.

Okay. And lastly, just given where pricing is now and your inventory situation, are there any significant inventory adjustments -- charges or gains that will be recognized in the fourth quarter?

Greg you want to address that?

We don't anticipate any significant adjustments. There are always inventory adjustments when we get the ground, which we are going to do in Oakland, so we can put in the mega shredder.

Right. Okay, but no LIFO/FIFO adjustments in the fourth quarter of note?

We don't do FIFO inventory.

Okay. So you should be fairly clean there.

Yes, it's an average cost inventory, so the only adjustments we have are for volumes only actually get to the ground at a specific yard.

Okay.

And we expect also to get to ground in Portland during the fourth quarter.

Okay. And then just last question, in terms of the pricing on the -- in the export market, how far out are you -- can you see prices now? In other words, how far forward are you sold on some of the material?

Well as you know, we try and sell forward, and we have been doing so in the fourth quarter. We're very comfortable with our forward position, but how those sales recognize will depend on when the shipments actually occur. And as I mentioned earlier, we see those prices strong in the fourth quarter and up [half] 10, 15%, so we're pretty comfortable where we are in the fourth quarter.

Are you seeing -- do you have shipments now booked out into the first quarter?

We actually haven't commented on that, I don't believe, in the past. But I think I would be comfortable saying our sales are robust in the fourth quarter in terms of volume.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Sal Tharani, Goldman Sachs.

Good morning guys. On the East Coast operations, you did most of your exports this time it looks like from this region. Did you see much benefit from taking the sales operations under your control in terms of margin expansion? Or was it mostly on the topline that you got benefit from higher selling price?

Actually, the sales that were made in the prior quarter, a lot of them were still arranged under our previous sales arrangements. But we did see a significant improvement in freight because of the destination, where the shipments went to. And also, the volumes of the Northeast did improve, but the West Coast was still much, much larger than the shipments out of the Northeast.

So what -- so 75% of the shipments went to India, Turkey, and Taiwan. Is that what you mentioned?

Yes, John had a list of -- what was it five countries I think it was?

Yes, we actually had several -- those five countries. We also shipped in 10 countries during the quarter.

What was your --

The other thing we mentioned is that there were about 80,000 tons that were sold but not shipped, and those were off the -- three shipments off the West Coast. So that had some effect on the balance between the Northeast and the West Coast volume.

Okay. What do you make out of lower ex imports into China of the scrap? Their volume of crude steel production has been rising consistently. On the other hand, they're taking less scrap appears -- which looks like from the data we have been getting. Do you have any insight on what's going on over there? Are they producing more scrap internally? Are they using more iron ore based process over there?

Well, I think that there are number of people who have very good insight into China. My view on that is that the Chinese are doing a number of things to rationalize their steel business, and among those things they're being quite cautious on their expenditures both on foreign imports of scrap but also in terms of where they're going with their import subsidies and so forth. So they're back in the market again, and I don't think that from our perspective, we can draw too much in the way of any firm conclusions there.

Okay, and on the Auto business, if you look at your pre-GreenLeaf acquired stores where you had significantly higher margins, if you look at the previous record, how are you on those stores? Are you getting similar sort of margins or are they significantly lower? Are you close to it? Can you give us some color on that?

We don't break out margins by store. I think what I would say is that the startup costs on these stores, not just in the conversion but also the advertising and establishing themselves in the marketplace they're in, it'll take us a little bit of time before we understand exactly how those markets work with those stores. It's a little too early to tell yet on that process.

But the -- the stores which you owned in the past, margins over there are significantly high still?

Yes. They are significantly -- sorry I didn't understand the question.

I mean are they still as strong as they were in the past?

Yes. They're still very strong margins. Obviously, we commented on the fact that the cost of acquiring our cars has gone up. And so that from time to time we mentioned in the past on each quarter that sometimes that has an effect on the margin, but they've been consistent with traditionally strong margins in the self-service business.

And a couple of just housekeeping items -- the tax rate, what do you expect in the fourth quarter?

We're expecting a normalized tax rate in the fourth quarter, probably around 35%. 35 to 36%.

What were the CapEx and D&A in this quarter?

Depreciation was $7 million. Our capital expenditures were 25 million, and we're anticipating about $30 million in CapEx for the fourth quarter.

Great. Thanks very much.

John Rogers, DA Davidson.

Just a follow-up to -- can you give us some of the balance sheet items total cash, debt, working capital?

Net working capital was -- or net debt balance, I'm sorry, was $85 million. That represented a $41 million increase over the prior quarter.

Sorry, 85 million?

Yes sir.

Thank you.

That 41 million was used to purchase the [IZZO] minority interest in our Providence operation and also for the CapEx expenditures I just mentioned.

Okay. And total cash?

We'll disclose that in the Q.

When you say net debt, is that net of cash or --?

Yes it is.

Perfect. Thank you.

Sal Tharani, Goldman Sachs.

Once again, I am going to quickly go through what you have been saying in terms of margins. In the trading business, if I looked your margin, the profit per ton appears to be about $1.57 sensor or $1.60 -- something like that. What is the -- does it represent like a strong market or do you think generally in the past you have done better than that?

Well, the trading volumes and the margins in that business vary depending on a number of factors we mentioned. Of course, the factor that had to do that that's out of the Baltic ports and so the winter weather and so forth does affect that. It also affects the ability to move the volumes out. So consequently, again, as we buy forward and then sell, sometimes those margins are reflective of average cost of inventory that are a little different. We see the margins in that trading business change substantially from year to year. And Greg, do you want to add anything to that point in terms of any expectation on those?

Well, as we pointed out, the margins -- I mean the volumes grew almost -- got it right in front of me here -- more than 100% mostly due to the weather. We were unable to ship out in the second quarter because of the weather in Russia and that has substantial amount to do with the volume. And again, as John pointed out, the pricing is always (technical difficulty) because we don't add value to the products. It has a much smaller margin. And we didn't operate this business the previous years. It was operated by our joint venture partner, so we don't have a whole lot of insight to long historical numbers in this.

Well, there are two or three things that are occurring. One is the internal consumption of scrap within Russia, much as we commented previously on internal consumption of scrap in the United States has had some effect on the acquisition cost of our product. And we have seen that. But one of the things it does, out of the global exchange volumes we get a very good view of the overall marketplace for all of our scrap product, not just the scrap product that comes out of the Baltic.

And on the steel business, you have given a -- you expect the price to go up about $10 to $20 a ton. Is it safe to assume that your actual margins will increase because the scrap prices are probably not increasing at this rate?

Well, the scrap margins of course we also noted would increase -- scrap selling prices would increase during the fourth quarter. We have a positive outlook for our steel margins in the fourth quarter. That, of course, can be affected by its impact on imports which have grown substantially, but so far haven't seen to undermine the pricing model that we've seen so far this year. So I think that from our perspective, we should see those prices perhaps provide a little additional margin, but that it will depend on where the scrap prices go during the quarter.

(OPERATOR INSTRUCTIONS). John Tumazos, Prudential.

Congratulations on the good results. It has been about three years that scrap prices have been pretty high. Do you find that the level of obsolete scrap generation has reached a new plateau, steadily rising because of the higher prices stimulating supply? Or is there a depletion of the easily accessible reservoir and a diminution of the inflows?

Well obviously, those are pretty broad questions, but I can offer a couple of comments about it. We've seen some statistics that think -- that point out that we are using -- this World Steel Dynamics statistic that we are using about 98% of the available scrap pool, which mostly comes from North America and Europe with the addition of the former Soviet Union scrap. And that pool seems to have obviously benefited by the increase in prices as you pointed out. That tends to bring out more available scrap.

But at the same time, it's been fairly static. Where you expect to see additions to that pool would be in the developing countries, as they generate more and more consumption of products that eventually turn into scrap. But that takes some time, and we've seen I think perhaps from the pricing we've seen more activity in the Japanese scrap market. But all in all, it's been a pretty static pool which has held substantially keeping the prices up.

In addition, of course, the other competitors of ours that are not scrap based have had a very high iron ore and DRI pricing as well, so it's been a pretty substantial strength in the market for pricing on those products.

Thank you.

With that, ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I would like to turn the call back over to management for any closing remarks.

Thank you very much for being with us today and we look forward to talking to you again.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.