Radius Recycling Inc (RDUS) 2007 Q2 法說會逐字稿

Welcome to the Schnitzer Steel earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. We need to remind you that the Company's presentation and discussion today contains forward-looking statements subject to the Safe Harbor provisions of Federal Securities law. Including estimates of future 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 listed in our earnings press release, issued this morning and are described in detail under the heading--Factors that could affect future results and the management's discussion and analysis section of the Company's most recent quarterly report on Form 10-Q.

I would now like to turn the presentation over to your host for today's conference, Mr. John Carter, President and Chief Executive Officer. Please proceed, sir.

Thank you and good morning. Welcome to the Schnitzer Steel Industries 2007 second quarter earnings webcast and conference call. I'm joined on the call by Greg Witherspoon our CFO. After a few introductory remarks, we'll be available to answer your questions.

We put out a press release this morning with the details of our second quarter results. Our call today will be hitting the highlights of what occurred during the quarter, a discussion on management's current areas of focus, and key trends we see in each of our businesses. We had a very good quarter, delivering to shareholders at 37% year-over-year increase in earnings per share. Net income was up more than 33% sequentially and year-over-year. We grew our revenues 50% over the second quarter of last year while maintaining overall operating margins. And turned a 19% increase in revenues from the first quarter of this year into a 41% improvement in operating income in the second quarter. Our improved financial results clearly are reflective of our ability to take maximum advantage of the strong markets in which we operate by leveraging our assets through higher volumes and faster inventory turns. The results also reflect our flexibility in adapting to market trends by changing our product mix and diversifying our customer base.

Let me take a few minutes to summarize our second quarter results. In the metals recycling business, we reported significant increases in revenues and operating income due to higher ferrous and nonferrous volumes. Operating income was up nearly 70% from the first quarter and more than doubled compared to the second quarter of last year. As you know, we've made significant investments to upgrade our equipment and our infrastructure at our major processing facilities. The best way to take advantage of these investments is to increase the tonnage we run through these facilities. We have made increased volume a key part of our operating strategy and we're starting to see the results.

Increasing volumes means buying more material. The investments we've made in new shredders at sorting systems allow us to process more material and to do so more efficiently. This gives us the ability to be aggressive in our purchases. We can also increase our volumes through value-enhancing acquisitions. We completed an acquisition in New Hampshire in December that has already paid dividends. Through additional tonnage we are able to send down to our Boston shredder. We will continue to be focused on leveraging the investments we've made to provide value for our shareholders.

We also sold record ferrous volumes, well over 1.1 million tons in our processing business. If you look at our year-to-date processing volumes of a little more than 2 million tons, the run rate is higher than it's been for us in the past. We have made good progress in achieving our volume objectives in this area. Our nonferrous volumes have been following the same upward trend. During the quarter, worldwide markets for scrap remains strong. We continue to see benefits from the diversified customer base with sales to 12 different countries led by Turkey, Thailand, Malaysia, and India.

Through our operation in the Southeast, we were also able to take advantage of the strengthening domestic markets. The supply of raw material is tight. And during the quarter, our buy prices were also higher. Ocean going freight rates remain stubbornly high. Yet despite these factors, our operating income and margins were strong and improved significantly both quarter-over-quarter and year-over-year.

Turning to the steel manufacturing business, we continue to be pleased with the results at the mill. And we have just completed another solid quarter financially coming off our prior record quarters and record year. The West Coast markets for long products remain good. We expected to see the normal winter slowdown in construction markets lead to lower sales and during the first part of the quarter that was exactly what happened. Toward the end of the quarter, however, the market started to heat up, due to strongly expected demand and rising scrap prices, a number of mills announced price increases, the first of which was effective March 1. As a result, we saw a flurry of activity from customers looking to beat the price increases. While we had originally expected sales volumes to fall from the first quarter, they actually increased.

Although prices were down slightly from the first quarter of the year, the scrap markets continued to rise. While revenues were up due to the higher volumes, margins were squeezed at operating income decline. I should point out that 100% of the scrap used by the steel mill is provided through our metals recycling facilities. When the steel business is hurt by higher scrap prices, for the most part the metals recycling business is enjoying an offsetting benefit. One of the things that helped our steel mill mitigate the rise of scrap prices was our sales mix. The team at the mill did a good job of adapting to market conditions by shifting the product mix toward higher demand products to match our customer demand. This offset some of the margin squeeze at the mill.

Turning to the auto parts business. We were pleased to see good improvement in the financial results as operating income increased 38% year-over-year and 32% quarter-over-quarter. As a result of aggressive purchasing of cars, we did see an encouraging increase in the contribution from core and scrap sales, which offset the normal seasonal decline at emissions and part sales due to winter weather conditions.

The market for purchase vehicles continues to be very tight, which is a function of overall conditions in the scrap industry. As with our other businesses, our focus is on increasing volumes and turning our inventories faster. Let me now turn the call over to Greg Witherspoon our CFO to go through some of the financial details for the quarter.

Thanks, John. As we said at the top of the call, a lot of the details regarding this quarter are included in the press release, so we would encourage everyone to go through the numbers we have provided there. Let me quickly take you through some of the highlights.

As John has already discussed, we had a very strong quarter with a big story being the higher volume and prices in our metals recycling business. Ferrous volumes in our processing business were over 1.1 million tons, up 32% from the first quarter. Nonferrous volumes increased to 90 million pounds or 13% higher than Q1. Clearly, any lingering disruptions from the first quarter installation of megashredders in Boston and Oakland appear to be behind us. The markets remained strong, as well. Average net ferrous selling prices were up $11 per ton from the first quarter and nonferrous prices remain fairly high level, although down slightly from Q1.

As a result of the strong market, we were able to expand our margins as sales prices went up more than purchase prices. Excluding global trading activities, the margins in our domestic processing business increased from 8% in Q1 to 10% in the second quarter. In the steel business, we had expected volumes would be down due to seasonal factors, but they actually increased going from 170,000 tons in Q1 to 179,000 tons in Q2. As John indicated, some of this was an acceleration of orders due to the impending price increases, but all in all we believe it was a reflection of the continued strong markets for steel products on the West Coast.

Operating income was down from both Q1 and Q2 of last year, primarily due to a lower scrap spread. That is, the difference between the selling price for steel and what it cost to purchase scrap for the furnace. I think it is important to note that the five quarters prior to this one were the five highest in the history of the steel company. So while operating income was down, the financial performance at mill is still very solid.

In the auto parts business, we just completed our seasonally weakest quarter, yet income was up from the first quarter as well as on a year-over-year basis, which was encouraging. We have been working hard to increase our purchases of scrap vehicles and to increase our velocity and have made good progress in that area.

During the quarter, we bought back 1.25 million shares of the Company's common stock and have now repurchased 1.5 million shares since November or roughly about 5% of the total shares outstanding. Capital expenditures during the quarter were $18 million. And our depreciation expense was $9 million. Debt net of cash was $152 million or 17% of total capital. Since the beginning of the fiscal year, we have spent $128 million on acquisitions, share repurchases, and capital expenditures. During that time, our net debt has only increased $75 million. We think our strong balance sheet and cash generating capabilities will continue to provide us with a flexibility to make more of these value enhancing investments. Let me turn the call back to John now to discuss our third quarter guidance.

Thanks, Greg. First, I'd like to update you on the annual guidance we've provided for the metals recycling business. Previously we had stated that annual ferrous processing volumes would be in the 3.6 to 4.0 million ton range. As we discussed earlier, we've already sold a little over 2 million tons halfway through the year. We feel comfortable that we will end the year toward the upper end of that range. As always, the timing of export shipments can have an impact on the volume number. Barring unforeseen slippages of shipments into fiscal 2008, there is a good possibility that we could exceed 4 million tons of processing for the year. We had forecast our nonferrous sales volumes to be between 320 and 340 million pounds for the year. Through the second quarter, we shipped 170 million pounds so it looks like we're headed toward or through the upper end of that range as well.

For the third quarter, we expect ferrous volumes to be 100 to 150,000 tons lower than our record shipments in the second quarter. I should point out that these projected volumes are still approximately 10% higher than the volumes shipped in the third quarter of 2006. And again, reflect the fact that the run rate for ferrous tonnage has moved upward. Nonferrous volume should approximate the 90 million pounds shipped in the second quarter. We expect the markets for ferrous scrap to be extremely strong. With average step prices at record levels and $40 to $50 higher than the averages of the second quarter. Nonferrous prices are expected to remain at the relatively high levels of the second quarter.

Higher sales prices usually mean higher volume prices as well and we expect the third quarter will be no exception, particularly in the northeast where the competition for material remains fierce. The benefit of the higher prices will be partially absorbed by the higher purchase cost. But we do think the opportunity exists to expand margins during the quarter based on current trends in the market. In the steel manufacturing business, industry reports are consistent that things have really started to pick up and prices are on the rise. As I mentioned earlier, there have been a series of price increases reflected both strong demand and higher prices for scrap. Based on what we see at the moment, third quarter prices are expected to be up about 10% from the second quarter meaning that the average price net of freight from our mill would be approaching $600 a ton.

As we've discussed, we've been planning a couple of projects that will increase capacity and improve efficiencies at the mill. At the beginning of March we began a 6-week shutdown of our larger rolling mill for the installation of a new reheat furnace. We also moved forward with construction of a new billet craneway to increase our handling capacity and improve our safety environment. Since we anticipated a shutdown, we've been building inventory to ensure we still had product to sell while the mill was down. Not only are we able to keep our volumes up, we've got product to sell into these very strong markets. As a result, we expect volumes to approximate what we sold in the second quarter or roughly 170,000 tons. I'm pleased to report that the reheat furnace and the billet craneway projects have been successfully completed and that on an annual basis, we now believe the capacity of the steel mill to be about 750,000 tons.

Finally, in the auto parts business, we think the third quarter is shaping up to be pretty decent. Showing continued improvement from our emphasis on volumes and inventory turns, retail admissions and part sales should benefit from usual third quarter strength. We are starting to see improved performance from the five self-service conversion stores, which will also contribute to improvements over the second quarter. Higher scrap and core prices should translate to higher revenues in the self-service business and we think there may be a chance to expand margins a bit if those prices rise faster than our vehicle purchase costs.

I'd like to conclude by recapping. We just completed a very good quarter. The long-term fundamentals and all our businesses remain strong. And we continue to make progress on improving the efficiency of our operations to ensure we are able to maximize our competitive position regardless of market conditions. In short, we remain very optimistic about our future. Let me now open up the call for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of John Rogers from D.A. Davidson. Please proceed.

Hi, good morning. Congratulations on a great quarter. Couple of things, first of all, in terms of the export market for scrap, you touched on it a little bit, John. But can you contrast what the demand is off the West Coast verses the East Coast? Sort of how you're seeing those markets right now? And if there is a significant difference?

Well, I think that those markets vary, obviously, from time to time, John. And it depends a great deal on whether or not, for example, off the East Coast the Turkish mills are actively in the market. And as I've commented in the past, they occasionally collectively sit out for a while and then come back in. Whereas on the West Coast, as I mentioned we sold to 12 different countries around the world in this last quarter on the West Coast since we've expanded the number of customers we have off West Coast markets. Again that market varies considerably off the West Coast. So I'm not sure I can give you any specific guidance about it. The selling prices, again, vary depending on where the mills happen to be at the time.

But the stronger selling prices that you're seeing, at least for the third quarter it sounds like possibly for the entire second half. Is that in both markets?

Yes, we see it in both markets. And we've been talking, specifically about third quarter, yes.

Okay. And then, the other thing is just on the -- your share repurchases, just so I'm clear, the stock that you bought back in the quarter, have you bought stock since the end of the quarter, as well?

Well, as you know, we don't talk about timing and other specifics about our share repurchase program other than what we've announced and anything that we may do going forward from the end of the second quarter, of course, will depend on the timing and appropriateness of where we are. We've got a blackout period in place, obviously and it does affect anything we might do. So just really not much to say on that subject.

Okay. And then last thing, if I could, in terms of M&A activity, any comments there in terms of what you're seeing or potential opportunities out there?

Yes. We still see a lot of opportunity for consolidation, particularly in the metals recycling business and the auto parts business. And we actually have reached definitive agreement today and over the weekend to acquire two recycling companies, Maine Metal Recycling Inc., and Alaskan Metal Recycling Company, Inc. And those two companies, one has operations in Maine, and the other in Anchorage, Alaska. We'll handle another 50,000 or so tons of ferrous scrap annually and 8 to 9 million pounds of nonferrous scrap annually, which will be additive to our total. So we're, we still see opportunity, these are -- a lot of them are not large companies, but on the other hand, as I've said before in this very buoyant market, people have very positive expectations about sales prices for their companies.

Okay. I assume on these two, the Alaskan and the Maine, they will feed your Boston and Tacoma yards, respectively?

That's correct.

But they aren't shredding operations?

No, they aren't shredding operations. And the comment that I made about the additional volume is, in fact, additional volume to us that we get some other volume from them already.

Okay. But that's incremental volume, the 50,000?

That's correct.

Oh, great. Congratulations. Okay. Thank you.

Your next question comes from the line of Sal Tharani of Goldman Sachs. Please proceed.

How are you?

Morning, Sal, fine, how are you?

Good. During your last conference call, you talked about, when you talked about the shredder in Boston, you mentioned that it may take a couple of quarters, two or three quarters to have all of the bugs out. It sounds like things have done much well and you believe that the problems are behind. Is that correct what I heard?

As you can see from what we've said already, we've been very pleased from the operation of both the shredder in Boston and the shredder in Oakland. I wouldn't call them problems that we had last quarter, basically it's what you run into in start-up. Our start-up learning curve and the run rate on those shredders both have been a pleasant surprise to us. We've actually got them up to where they're performing quite nicely, much quicker than we had anticipated.

Are you still running the second shredder, the older shredder at Boston, or have you scrapped that?

No. That shredder's history.

Still running?

It's not running. It's been dissected, actually.

On these acquisitions, what kind of multiples are you seeing out there? Are you buying these? Are you buying also your own stocks, are you finding them at a better multiple than what you are trading at?

Well, Sal, you know we don't comment on what we pay for companies that we buy or even on the multiples, but obviously we look for opportunities to deploy our capital in ways that we think could bring value to our shareholders. And we're clearly very focused on that. So that means you consume if you bought something it's because we found it to be an attractive use of our capital.

And lastly on these two changes you made at your steel division, the crane and the -- craneway and the reheat furnace is there any other bottleneck you see in that chain? Or are you think you are pretty much maxed out on your capacity over there?

Well, it's -- there are a variety of things that affect our maximum capacity at the mill, including our permitting operations and all sorts of other issues that come along with the operation of a steel mill. We continue to look for ways to not only perform routine and needed maintenance for the better operation, but we continue to find ways that we think that we can improve the operations there. The debottlenecking that we've been talking about has been fundamentally on mill number two and on the craneway. But we think there are other opportunities and if we feel that the climate is right economically and we see the right thing to do is to go ahead and make those moves, we'll do them.

And one more thing. Apparently the way your business is, and you always talked about it, you sell 2, 3 months advance in the export market and then collect scraps. If you're seeing some softness in the scrap prices in the U.S. sporadically based on what you've been saying, it should in fact continue if the scrap prices decline in the U.S. continues over the next couple of months. That should benefit you with results buying prices for scrap in the U.S.?

Well, as you know, we do sell forward, we're comfortable with our forward position. A lot of different things affect our profit margins, including freight costs and a variety of other issues that come into play. But -- and of course the time of the shipments, which is an important thing in terms of our quarterly results. But when there is a softness in the domestic scrap market, as I made in my earlier comments, we see the opportunity for some margin improvement in the third quarter.

Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Eric Glover of Canaccord Adams. Please proceed.

Hi. Great quarter, guys.

Thank you very much, Eric.

Just wondering if you can comment on your CapEx plans for the remainder of this year and also fiscal '08, please?

I think I'll ask Greg to address that.

We have pretty much front loaded the first 6 months in our metals recycling business in CapEx, the two big projects for the steel mill will be completed in the third quarter as will the installation of the megashredder in Portland. We see doing about double what we've spent so far for the year. And we are just barely getting into our '08 plan right now. So I don't think I'm really prepared to get into that. Although we do see it decreasing slightly.

I might add to that, you'll recall we've commented before that our capital plans are based on 36 months paid back and at 33% return. And we feel very comfortable with the capital programs for added expansion or added capacity. All are at least that if not substantially better. We'll continue to be aggressive on our capital program as long as we see opportunities to do the things that we think make sense to build our business for the longer term.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Wayne Atwell from North Street Capital. Please proceed.

Thank you. And congratulations on a strong quarter.

Thank you.

Thank you.

A couple of questions. I understand there's a number of shredders being added around the industry. And I'm hearing from some of your competitors that the margins might be declining in a couple of years as more capacity comes online, do you agree with that?

Well, I think as you may have heard us talk before, Wayne, one of the things that affects the shredder capacity and the margins has to do with the location of the facilities and what's happening in the geographic area where those shredders have been put in place. One of the things that we've emphasized about in our company and where we think we have an advantage is our ability to export from deep water ports and our ability to also sell domestically depending on where the demand is. Again, each of these installations of large shredders, you have to do an analysis of what actually is happening in that smaller geographic area to understand whether or not it makes economic sense or may have some impact on margins.

In New England, for example, our installation of a megashredder there resulted in our ability to actually combine operations and close down one of our other shredders. Additionally, the way we analyze the megashredders for our purposes and with our volumes, these shredders are able to actually reduce our operating costs even without an increase in volume. As I've said in the past our emphasis is on increasing our volume. We see the benefit of that in terms of shredder operational cost. So I don't think that it's -- I think there's certainly places where you could look at the market, the volumes of available scrap and where the mills are and say perhaps there's a risk that there might be some overcapacity in those areas. We're very comfortable with our analysis of the areas where we are, what we've done with our shredders and what our long-term plans are.

Good. And how many shares do you have authorized for repurchase right now that you haven't acquired yet?

3.2 million additional shares.

Okay. And then lastly, just in general because you're not going to want to talk about this specifically, but are there many opportunities in the used auto parts business? Is there much out there? I know it's a pretty large business, is there much out there that looks attractive for you?

Well, again, as I've commented before, one of the things we've looked for in the auto parts business is geographic concentration because we think it helps us in terms of a variety of things that relate to our operations. We think there's lots of small opportunities in the auto parts business. The problem is they're mostly small. There are very few groups that are large enough to make a significant difference in a geographic area if they were on the market. And of course, in this kind of an environment for the most part those groups have a high expectation of the value of their operating business. I think there's -- will continue to be opportunities for consolidation and there'll continue to be things that we think that we want to do that will assist us in our focus in concentration in geographic areas. And from time to time, we may see something that would allow us to go into a new market with enough size and volume that we think it's worth the effort.

Great. Thank you.

At this time, I'd like to end the Q&A session and turn it over to Mr. John Carter for closing remarks.

Thank you. Thank you, all for being here today, we're obviously very pleased with the quarter and pleased that we were able to deliver good returns to our shareholders, and look forward to talking to you again. Thanks very much.

Thank you for your participation in today's conference. This now concludes the presentation. You may disconnect. Have a great day.