Radius Recycling Inc (RDUS) 2007 Q3 法說會逐字稿

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

We've put out a press release this morning with the details of our Q3 results. On our call today, we will be hitting the highlights of what occurred during the quarter along with a discussion of management's current areas of focus and key trends we see in each of our businesses. We had a very good quarter. All three of our businesses showed strong financial performance. Over the last several quarters, we've made significant investments in capital improvements with the strategic objective of upgrading our infrastructure, allowing us to increase volumes and creating operational leverage. Our employees have done an outstanding job of turning those infrastructure investments into measurable operational improvements. As a result of the efforts by all our people from Boston to Oakland and McMinnville to Fort Worth, we were able to deliver record third quarter net income and earnings per share.

The markets in which we operate remain strong, as evidenced by record average net prices in both our metals recycling and steel manufacturing businesses. The positive macroeconomic conditions which drive our businesses, namely the growing and sustainable worldwide demand for steel products and the raw materials used by steel manufacturers remain favorable. Clearly, the continued strength of these markets has had a positive impact on our financial results. Equally as important, we continued to do the things that allow us to maximize the benefits from these markets. That is to leverage our unique export facility to take advantage of the export business which is often more profitable or sell domestically when it offers better returns. Utilize our investments in technology to become more efficient, and increase throughput at our operations where the markets will support higher sales volumes. We think our strong financial results are reflective of these efforts.

Let me take a few minutes to summarize our third quarter. In the metals recycling business we posted record quarterly revenues and operating income was up 38% from second quarter and 64% year-over-year. Net average sales prices were up $57 per ton from the second quarter. More importantly, after we entered into sales agreements for the export sales we made in the quarter, the domestic markets for scrap fell, and we were able to buy the raw materials we needed at lower prices which allowed us to widen margins. To maximize the benefits from these positive conditions, you have to be able to efficiently access the export markets. Our platform with six major port facilities on both coasts of the U.S. and in Hawaii give us the unique ability to cost effectively ship overseas and allowed us to export nearly 650,000 tons this quarter.

Our customer base remained diversified as our processing and trading operations sold to 15 different countries with multiple customers led this quarter by Turkey, Taiwan, Malaysia, and Egypt. Market conditions at any one point in time can vary significantly from country to country. The flexibility to sell to all regions of the world as well as here in the U.S. allows us to take advantage of these differences and shift our sales to the areas that provide us with the best incremental returns. We continued to be aggressive in our purchases which allowed us to better utilize our assets by maximizing throughput, thereby taking advantage of the lower marginal cost of processing and providing additional products to sell. All of our regions experienced an increase in production.

As a result, our ferrous sales volumes were the second highest in our history. We are very pleased with the results we are getting from our new megashredders as we were easily able to handle the increased volume of material coming into our Boston and Oakland yards. In addition our shredder conversion costs are starting to decline. As you are aware, we installed new nonferrous sorting systems along with the new shredders and we're seeing benefits there as well. While we need to look at these numbers over a longer period of time and results may differ by facility, the extraction of nonferrous materials in Boston for example, initially appears to have gone up about 15% which would confirm our expectations regarding the benefits of the investment we've made in this new technology.

We did get one-time benefits from the sale of approximately 5 million pounds that had accumulated in Boston while we were testing and refining the new equipment in the two prior quarters but the bottom line is our nonferrous recovery is improving. This means more higher value product to sell.

These new downstream systems on the mega shredders are providing a related benefit. Our ability to further reduce the amount of copper remaining in the shred allows us to sell a higher quality product and provide further assurances to our customers regarding our ability to consistently meet strict product specifications. As our own steel mill can attest, our West Coast processing operations were already producing very good shred product. These new systems only enhance the quality of what we are able to sell and provide an opportunity to even further differentiate ourselves from our competitors. During the quarter, we also successfully closed on two additional acquisitions in Maine and Alaska which will allow us to increase volumes and take further advantage of the investments we've made in infrastructure.

We're very pleased with the results from the advanced recycling acquisition completed during the second quarter. We're seeing the ferrous and nonferrous volumes we have projected and getting the benefits from routing the ferrous materials through the Boston megashredder.

Turning to the auto parts business operating income was a quarterly record and was more than double the income recorded in the second quarter of this year. Our focus in this business has been like that in our other operations, namely increasing our volumes to take maximum advantage of our capacity to process scrap vehicles. While the market for scrap vehicles remains very tight, we were able to increase our purchases more than 15% from the second quarter. As a result, we had more cars from which to choose in our self-serve stores as well as higher scrap and core sales with the latter two a function both of higher volumes as well as higher metals prices.

Finally, in the steel manufacturing business, the demand for steel on the West Coast continues to be very good. During the quarter, average prices were nearly $600 per ton, a record for the mill, which helped offset higher scrap prices. More importantly, our employees at the mill did a great job by increasing volumes from the second quarter despite a five week shut down of our larger rolling mill to install a new reheat furnace and complete our billet crane lift. These projects will allow the annual capacity of the mill to increase more than 750,000 tons while at the same time improving the safety of our workers. I'm pleased to report that both these projects were completed successfully and we are already seeing the benefits. Now, let me turn the call over to Greg Witherspoon to discuss some of the financial details for the quarter.

Thanks, John. Let me take a minute to go quickly through the highlights of this mornings press release. We had a good quarter with all of our business showing sequential improvement in operating income from the second quarter. Earnings per share increased 58% from the second quarter and 32% compared to the prior year third quarter number adjusted for the SEC DOJ reserve. Metals recycling ferrous processing sales volumes were up 16% year-over-year while sales volumes were down slightly from the second quarter of this year, production actually increased or were kept in inventory which means those volumes should be reflected in our fourth quarter sales. Nonferrous volumes were even better news rising 17% quarter-over-quarter and 20% year-over-year. Margins in our metals recycling processing operation were a healthy 12% representing an increase on both a sequential and year-over-year basis.

More great news comes from our auto parts business. They recorded revenues which increased 23% over the third quarter of last year and 19% over the second quarter of this year. In both cases, increased car purchases are helping to translate into greater revenues and we also saw an increase in the margins from core and scrap revenues as our purchase prices for scrap vehicles lagged the run up in selling prices. As a result, operating income in this business of $10 million was a record and more than double the amount recorded in the second quarter.

Our steel business was able to show a slight increase in sales volumes over second quarter despite the shut down for new capital projects. Sales prices were a record and operating income increased 47% from the second quarter as sales prices increased more than the cost of scrap and alloys used in making steel.

Compared to the third quarter of last year, income was down as the 11% increase in sales prices was more than offset by a 22% increase in scrap prices for the same period. Nonetheless, operating income during the third quarter was the third highest in the mills history.

On a consolidated basis, depreciation during the quarter was $10 million and capital expenditures were $22 million. Our tax rate for the quarter of slightly less than 35% was lower than prior quarters due to 1.3 million in state tax credits earned. For the full year, the tax rate is expected to be about 36%. During the quarter we made no further purchases under our share repurchase program. Under the authority granted by our Board, we still have 3.2 million shares available for repurchase. Future activity will be based on alternative uses for cash including acquisitions, capital expenditures and market conditions for the Company's stock. Our balance sheet remains strong with net debt of $161 [million] and a debt to net capital ratio of 17%. Since the beginning of the fiscal year, we have spent $166 million on capital expenditures, acquisitions and share repurchases while increasing net debt by $83 million. Finally, I'd like to point out that in response to a number of comments from our shareholders, we have included a condensed balance sheet in today's earnings release. Complete, condensed financial statements will be available later today when we file our third quarter 10-Q. Now let me turn the call back to John to discuss our fourth quarter outlook and wrap up the call.

Thanks, Greg. Let me start with the outlook for our metals recycling business. We expect higher third quarter production and ending inventories to translate into higher fourth quarter sales volume with processing sales expected to be between 1.1 and 1.2 million tons depending on the timing of shipments. With these volumes, that means we will be expecting to ship from our processing operations between 4.1 and 4.2 million tons for the fiscal year as a whole. As I mentioned earlier, during the third quarter we received the benefit from selling about 5 million pounds of nonferrous material which had accumulated in Boston during the installation and testing of the megashredder in back end systems last Fall. As a result of that one-time impact our nonferrous volumes compared to the third quarter are expected to fall 5 to 10% in the fourth quarter. Even with the drop, nonferrous volumes will be at a higher rate than in earlier quarters due to improved extraction at higher shredder volumes and we think more reflective of the future than the past.

We continue to expect strength in the export markets for ferrous scrap, although we do think prices have stopped our upward trend at least for now. Based on what we have seen to date, average overall net prices should remain at about the same level or be slightly lower than the record prices attained in the third quarter but remain significantly higher than average prices in the first half of the year. As I mentioned earlier, we were the beneficiary of favorable market conditions in Q3 which allowed us to widen margins as we were able to make sales before the market dropped and buy behind at lower prices. Although there is still a sizeable gap between the export and domestic prices and we expect the spread between buying and selling prices to remain attractive, we don't think the Q4 spread will be quite as good as what was realized in Q3.

Nonferrous prices have been volatile of late. While prices for Zorba which is a by-product of shredding process have been fairly steady we have seen downward pressure on other nonferrous materials. Based on what we see today overall nonferrous prices should be about the same or slightly lower than prices in the third quarter.

In the auto parts business, full service and self service conversion store parts sales are expected to show improvement on both the quarter over quarter and year-over-year basis and result in an overall improvement in margins for the quarter. West Coast market conditions in the steel industry remain good and it looks now like our steel mill should be able to maintain or increase the record average prices from the fourth quarter while showing a slight increase in volumes. Scrap price increases have been slowing and we expect an increase in the metal spread which should more than offset fairly sizeable increases in the cost of alloys used in steel making.

Before we take your questions let me recap--We just completed another very good quarter. We continue to see global demand for steel products translate to strong market conditions for our businesses. Our unique capability to efficiently access the worldwide markets for recycled metals and our ability to utilize technology to increase output allow us to maximize the benefits from these markets and to take advantage of what we believe are very good long term fundamentals in all of our businesses. We remain optimistic about our future. Let me now open up the call for questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of John Rogers of D.A. Davidson.

Hi, good morning. Hopefully you can hear me all right, I'm on my cell, but I was just curious, John or Greg, could you give us a sense of what the dollar savings or the benefits have been from the new shredders?

Well, John, as I mentioned, the mega shredders are operating quite well for us. We haven't had an operating history yet to be able to talk about specific volumes savings or specific items of that nature, but they're performing actually better than our expectations that came up to speed more quickly than we had (inaudible).

Okay, thank you.

Thank you very much.

And I think, John, what we said before, if I could remind you--.

Yes, please.

We had expected the megashredders to operate more efficiently at the same volume basically that we had earlier when we made the decision to put them in and we expected savings from the incremental cost of that savings because those volumes increased and that's the (inaudible).

Okay, well, I knew there was a lot of variables, but to get more nonferrous recovery, is there any guess there on what that is per ton or even increased production as a result of it?

No. I think we said that we experienced a higher recovery rate in Boston and gave you some indication of that being in the 15% range, but fundamental -- that's from the nonferrous or Zorba, but fundamentally as I say, we really don't have enough operating history to give any definitive view on what the ultimate results will be except that they are doing very well and better than we had any reason to anticipate.

Okay and one more question if I could. You mentioned the strength in the export market, be interested if there is any significant difference between the West Coast and the East Coast in terms of end markets?

As you know, John, the export markets vary frequently, almost daily around the world depending on which mills in which countries they are buying and we have seen during the quarter the export market from the Asian side continue to be strong enough to actually get back shipment off the Atlantic Coast into Asia, but at the same time we saw some very strong periods in the Mediterranean region in Turkey and Egypt and those markets will continue to vary and that's one of the things that we believe is part of our strength is that we're able to access those markets off our deepwater ports wherever they happen to be most advantageous for our sales.

Okay. Thank you and congratulations on the quarter.

Thanks very much, John.

Thank you very much, sir. Ladies and gentlemen your next question comes from the line of Sal Tharani of Goldman Sachs. Please proceed.

Good morning, guys.

Good morning, Sal.

You said you purchased around 15% more cars during the quarter. Was that something you will continue to pursue, is that a new strategy or is there something that you have an opportunity to buy more cars?

Well, I think that as we've said before, that we think that maximizing the utilization of the assets we have is part, a key part of the way we think about our business, and that means providing our auto parts business with higher volumes of cars, for us, it's plus, and so we are aggressively buying more cars, that is a conscious decision that we've made and we'll continue to do that assuming it continues to make economic sense at a very competitive environment. Is there a particular reason that you're buying more cars? No. It's pretty much across-the-board. The regions of course are where we have operating facilities but we have that generally as an objective to the auto parts business and that seems to be carrying through quite nicely.

Okay, and also on the processing costs which I think you alluded to in your previous answer, unfortunately we couldn't hear much, that you are seeing some advantage from the megashredders in lowering your processing costs so you have actually seen that already in your Boston operation and other operations?

Yes, we've seen a couple of things and I'm sorry if the last call was not audible to you, but fundamental -- or last question, but fundamentally, what we've seen as we said in Boston was a higher recovery rate in the nonferrous side of about 15%. We also had said earlier that we expected the megashredders to operate more efficiently both in terms of hours of operation, utilization of electrical, electricity and so forth at the same volumes that we had in those facilities earlier and we expected to see an improvement on the incremental cost as those volumes went up. Those things seem to be the case. Obviously it's a little early for us to make any sweeping conclusions about the operation of megashredders because they haven't been in operation that long.

And the utilization rate, do you have any idea what utilization rates you are running these shredders at right now?

No, and we wouldn't reveal that anyway.

Do you have additional -- you can process more material if availability is there?

Yes.

Okay. Then the case with the other regions also besides Boston?

Yes.

Great. Thank you very much.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Eric Glover of Canaccord Adams. Please proceed.

Congratulations on a great quarter, guys.

Thank you, Eric, and good morning.

First question, getting back to the export market. Just wondering, I mean, we've been hearing that Turkey has been out of the market for the past couple of months. Just wondering in particular in terms of Turkey are they back in the market or do you expect them to be back soon?

Well, as I think we've commented in the past, Eric, the steel mills in all of the countries around the world are in a world market and they operate very effectively, efficiently, and intelligently in that market and the Turkish mills are clearly in that group in the sense that they have had a much more coordinated view of how to address the market and when they believe it's the most opportunistic for them to make a purchase, so we've seen a pattern of the mills in Turkey being out of the market for a period of time then coming back in when they need material. Our expectation is that they indeed will need material and we see signs of that need coming into the market recently, so we fully expect the Turks to continue to be an important part of our sales strategy and continue to expect them to have a major impact on the market.

Okay, thanks, and then I'm just wondering what you are seeing in terms of on the acquisition front to have multiples come down at all recently or are there still enough acquisition candidates out there?

Well, I think as we've said before, there's plenty of opportunities for acquisitions. This is a very unconsolidated industry and whether you're talking about the auto parts business or the metals recycling business, and we continue to look aggressively for opportunities that we think make sense for us both from a strategic standpoint and from a price standpoint. Obviously, with two or three years of good results under their belt, the owners of these businesses tend to be fairly optimistic and aggressive about the price that they would like to have for their businesses but we still see and still pursue opportunities that we think work well for us, for a variety of reasons. As I mentioned they fit with us strategically, they help us ensure the supply of materials to our facilities and they allow us to increase our volumes. We don't see any change in that. We expect to see that continuing.

Right. I'm just sort of curious more broadly speaking, have potential multiples that you might pay for these acquisitions come down given the decline that we've seen in ferrous prices?

As I said it's a very unconsolidated market, the multiples are really pretty much the view of the individual that's making the sale of his or her business, and they vary considerably.

Okay, thanks.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Wayne Atwell of North Street Capital. Please proceed.

Thank you. You pretty much addressed this but maybe I could refine my question a little bit. In terms of acquisition strategy, what's your approach going to be, auto parts, scrap yards and might you go overseas to expand your business either in the steel area or in recycling?

Well, we obviously look at the alternatives all the time. I mean, we have a very active internal group that looks at acquisitions. We're screening opportunities consistently, and we think that there may be some opportunities for different parts of our business to be overseas but obviously, it's something that we're not going to do lightly and we feel pretty good about the fact that our acquisitions have been integrated into our operations on a successful basis and we want to continue to be sure that we can acquire the right types of businesses that fit our strategy and that we can integrate into our operations at a pace and at a time that makes sense for us. But I think the reality is that there are plenty of opportunities for us that we're still pursuing and we expect to continue that program.

In terms of which category, would it be the recycling area or auto parts, which is the area where you're most excited about where we're likely to see the most deals?

Well, our metals recycling business is larger so the opportunities are larger in the metals recycling business but we're still very aggressively pursuing opportunities in the auto parts business. As you know, we almost doubled the size of that business with our GreenLeaf acquisition, so we've been very concerned and very pleased with the integration of GreenLeaf into our operations and as we continue forward, we see other opportunities in the auto parts business as well. In the auto parts business as I mentioned earlier, the industry is very unconsolidated and there's actually very few large opportunities in the auto parts business for us to look at. So we look at lots of small opportunities, greenfield opportunities and in that business we're already international because we have businesses in Canada.

And lastly, what are your thoughts on restructuring the Company and creating a standalone auto parts business where you might IPO it or spin it? Is that something that's on the agenda?

We always look at all of the opportunities but I don't think it's appropriate to comment specifically on anything.

Thank you.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our next question comes as a follow-up from Sal Tharani of Goldman Sachs. Please proceed.

Thanks. Just one more question. I know you said that the overall pricing for the steel products will remain either at the same level as third quarter or rise, but sequentially, are you seeing some weakness in the pricing, some softening or are you seeing the prices almost flat month over month or something like that?

Well, the pricing as you know, Sal, and you know this business very well, depends a lot on the product and what happens to be running through the mill at the cycle and where that is. We have been pleased that we've seen good strength in the steel pricing. We've seen a lot of recent activity from imports which I'm sure you're aware of, but the import pricing that we see going forward is actually not much different than the domestic pricing, so we feel good about it and we've also, as I mentioned earlier, note that the opportunity for a little easing from the pressure from the scrap price side would be helpful to mill as well.

And lastly, are you in your trading business from the Baltic, are you seeing any size that volume from there might be declining or may decline which you import or export out of that region?

No. It's an interesting phenomenon in the former Soviet Union in that the Russian Mills of course are very active. Steel production in Russia is growing, as you know, but we are able to access the material that we think that we want and need for our purposes and that we think that it will be somewhere in the 250 to 300 million tons in the fourth quarter and -- approximately and so we're comfortable we're still able to access the heavy metal scrap and the other products that we're able to out of the Baltic.

But you had a small loss in operating loss in that business. What was the reason for that?

Well, it's primarily because of the nature of the business, it's primarily a timing issue as to when we buy it and when we sell. As we've said earlier, that business for us is not one where we do any processing work so there's not a lot of value-added from our own activities in it, but it is helpful to us both in terms of the volumes of heavy metal in particular and the HMS product but also because it gives us a very good window into what the activities of steel mills are in multiple countries that buy from that region.

So you actually, there's some advantage of this business which you can't quantify in terms of intelligence it provides you for your processing business or export business out of the U.S?

Yes, that's certainly a part of it.

Great. Thank you very much.

Thank you very much, sir. Now I'd like to turn the call back over to Mr. Carter for any closing remarks he may have.

Well, thank you, all, very much for being with us this morning. We would like to end our call with a reminder and thanks to our employees for a great effort and fine results this quarter. Thank you very much.

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