Radius Recycling Inc (RDUS) 2008 Q2 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to Schnitzer Steel Industries second quarter 2008 earnings conference call. My name is Lacey, and I will be your coordinator for today. At this time, all participants are in a 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.

We need to remind you that the Company's presentation and discussion today contains forward-looking statements subject to the Safe Harbor Provisions of the Federal Securities laws, including estimates on future performance, and views on future market trends. Actual results may differ materially from those projected in forward-looking statements.

Examples of factors that could cause actual results to differ materially from 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 Managements Decision Discussion and Analyst' section of the Company's most recent Quarterly Report on Form 10-Q, and the most recent Annual Report on Form 10-K.

I would now like to turn your presentation over to your host for today's call, John Carter, President and CEO.

Thank you, and good morning. Welcome to Schnitzer Steel Industries 2008 second quarter earnings Webcast and conference call. I am joined on the call today by Richard Peach, our CFO. After a few introductory remarks, we will be available to answer your questions. We have put out a press release this morning with the details of our second quarter results.

On our call today, we will be hitting the highlights of what occurred during the quarter, and key trends in each of our businesses. In the quarter, we had outstanding performance from all three of our businesses. Compared to the second quarter of last year, the Metals Recycling, Steel Manufacturing and Auto Parts Businesses, all achieved increases in both revenues and operating income.

On a consolidated basis, earnings per share were a second quarter record. Our revenues and operating income increased 24%, and earnings per share increased 34% when compared to the second quarter of last year. Sequentially, revenues were up 24%, while operating income and earnings per share increased 42% and 47% respectively.

Let me spend a few minutes talking about each of our businesses. First, in the Metals Recycling Business during the quarter, the worldwide markets for ferrous scrap were very strong. The very tight long term supply and demand fundamentals, which are driving the strong pricing environment remain in place. Demand for steel products overseas is robust, creating pricing pressures on all the raw materials used to manufacture steel.

Domestic demand remains strong as well. Consequently the demand for raw materials continues to outstrip the relatively slow growth in supply, especially for recycled scrap metal. This increased demand has been primarily forecast to come from the growth of usage of Electric Arc Furnaces, particularly outside China. That growth is due in part to environmental advantages of the EAFs which we have noted in the past. Specifically, lower usage of energy, less air and water pollution, and reduced greenhouse gas emissions.

Additionally we are continuing to see signs that the integrated [mills], normally minimal users of scrap metal, are starting to see the benefits of increasing scrap usage, to help lower their own carbon dioxide emissions. This is a trend which could put even further pressure, upward pressure, on scrap prices going forward.

For the quarter, average ferrous processing sales prices were a record $326 per ton net of freight costs, a $46 per ton increase over the first quarter. On our last call we talked about the rapid run-up in export freight cost, which had resulted in the squeezing of first quarter margins. At that time, we commented that in a scrap market where the demand is strong, particularly overseas, it is reasonable to expect that over time, those higher freight costs could be passed through to the customer. We also indicated we thought that the increases in export freight costs would slow.

During the quarter, that expectation held true. As export freight costs moderated and gross sales prices for ferrous scrap increased, to offset the increases in ocean freight that occurred early in the fiscal year. In addition, ship availability has improved. There is no question that we are benefiting from the strong markets for ferrous scrap, but there are other elements in our business model, that give us a competitive advantage.

Without question, none of this progress could have occurred without the expertise and dedication of all of our people. We continue to believe that our export platform, scale, and investments in technology, position us well against the competitors in our various regions. We also continued to benefit from productivity enhancements, and the cumulative impact of strategic acquisitions.

During the quarter, we made bulk and container export shipments to customers located in 12 countries around the world. Our worldwide view provides us with the ability to sell to the region or customer group, where demand is greatest at the time, maximizing our revenues. During the second quarter, for example, we were able to take advantage of periodic regional market differences, and make shipments to Asia out of our northeastern operations. Cargo which would have traditionally been headed for the Mediterranean. This flexibility continues to provide benefits to our operating margins, and we were able to take advantage of the rising markets, to increase those margins.

Operating margin per processed ferrous ton excluding our trading Business, increased to $27 in the first quarter, to $43 in the second quarter. The second quarter figure included five shipments originally scheduled for the first quarter, which were under contract for lower margins, due to the rapid run-up in first quarter export freight costs. Without those shipments, our margins would have further expanded. During the quarter, we shipped 1.1 million tons of ferrous from our processing operation, and 96 million pounds of non-ferrous. With the ferrous sales volumes approximating the second quarter of last year, and the non-ferrous volumes increasing by 7%.

Turning to the Steel Manufacturing Business, year-over-year revenues were up 45%, due to an $80 a ton increase in average net prices, and a 25,000 ton increase in finished goods sales volumes. The sales volumes of 202,000 tons were a quarterly record. Our team at Cascade continues to deliver strong operating results, in a variety of market conditions. Sequentially, revenues were up 31% as both prices and volumes increase, the higher volumes and prices were despite softening business conditions in the Company's primary West Coast construction markets.

We are going through an unusual period, where strong volume and pricing statistics, seem at odds with weak customer demand. However, steel consumption, particularly on the West Coast, is greater than can be supplied by the domestic mills, and imports have historically been necessary to meet demand. Strong overseas demand for steel products the same conditions that create the robust demand for ferrous scrap and a weak dollar, have lead to a significant drop in steel products imported into the U.S. So while our customers aren't as busy as in past years, they have turned to the domestic manufacturers for price reasons.

During the quarter, we had separate shutdowns of the melt shop at our largest rolling mill, for heavy maintenance, and in anticipation for the down time of this work, we built inventory during the first quarter which enabled us to ship the record volumes during the second quarter. Year-over-year operating income increased 11%, due primarily to the higher sales volumes. As we discussed in previous quarters, higher raw material costs, particularly for scrap, remain the biggest challenge for the steel mill. Of course, our Cascade mill gets it's scrap supply from our Metals Recycling Business, so the increases in scrap costs are offset on a consolidated basis.

During the second quarter, the cost of scrap rose more than the selling prices, and partially offset the impact of the increased sales volumes. Compared to the first quarter operating income at the mill declined 8%, with one-time expenses associated with the maintenance shutdowns, and to a lesser extent, higher scrap costs more than offsetting the higher volumes.

In the Auto Parts Business, year-over-year revenues were up 29%, and operating income was up 31%, with the improvements driven by higher car volumes, and higher prices for scrap and cord. This successful change in our purchasing model would not have been able to take place, without the extra effort and dedication from our team at the Auto Parts Business. We continue to see the impact on this business of our strategy to maximize throughput at our facilities. Purchases of scrap vehicles increased 22% year-over-year, and was a major contributor to the increase in operating income.

In addition the revenues from foreign scrap on those cars rose faster than the purchase cost, primarily due to our ability to extract more value from each and every car processed. As a result, year-over-year margins also improved.

I would now like to turn the call over to Richard for more details on the quarter. Richard?

Thanks, John. Although all three of our businesses performed strongly, the Metals Recycling Business was the biggest contributor to the quarterly increase in operating income, up $22 million from Q1, and $12 million from last year's second quarter, so I wanted to start by providing some further commentary on those improvements. As John mentioned, positive market conditions resulted in sales prices for ferrous processing, net of freight, increasing by $46 per ton from Q1, and $89 per ton from the second quarter of last year.

In the last quarter we discussed that higher freight costs, impacted export sales by more than the increase in gross sales prices during that period, however this quarter, on a cost per export fund basis, the freight increase was less than $5, which was more than absorbed by the market. The overall total cost of freight delivering the product to our customers did increase to $80 million from $67 million in the first quarter, and that was mainly due to the volume impact of the five shipments which were delayed from quarter one due to ship availability at that time.

Looking at our balance sheet, our strong earnings lead to a decline in our net debt of $72 million from the end of the first quarter. The steel mill contributed to this improvement by toning inventories built during Q1 in preparation for the planned maintenance shutdowns, and the Metals Recycling Business sold the tons which had built up in Q1, due to the timing of shipments. Other results, we saw a positive decline in inventory balances at Q2, down $28 million from quarter one, contributing to the lower net debt position. Consequently, the ratio of net debt to total capital fell to 16% at the end of the quarter, a strong balance sheet position.

During the quarter, we repurchased a further 146,000 shares of our stock for $7 million. Since we restarted our buy back just over a year ago, we have now repurchased 2.9 million shares, or about 9% of the total shares outstanding. We have about 1.7 million shares remaining under the current repurchase authorization from our Board. Capital Expenditures in the quarter were [$18] million, and we spent a further $9 million in cash and acquisitions. Year-to-date we have now reinvested $94 million in value-enhancing opportunities to grow the business, or in returning money to our shareholders.

Depreciation during the quarter was $12 million which continued to be a good run rate for the year, and SG&A costs were $52 million, up $9 million year-over-year primarily due to the incremental impact of our business growth during the last Q1, and higher incentive accruals in share-based compensation expense.

Finally, our tax rate for the first six months was 35.6%, which we do not expect to change significantly for the balance of this fiscal year. Now let me turn the call back to John.

Thanks, Richard. Let me now turn to our outlook. At this point, all indicators are pointing to a very good third quarter. In the Metals Recycling Business the overseas market for scrap are robust, and prices are rising.

Based on the sales made today, average selling prices net of freight, are expected to increase more than $100 per ton, over the recently completed second quarter. Ferrous processing sales volumes are expected to approximate the volumes shipped in the second quarter, and be slightly ahead of the sales volumes in the third quarter of fiscal 2007. Non-ferrous volumes are also expected to increase 5 to 10% from the second quarter, and approximate the volume shipped in the third quarter of last year.

Net export selling prices for ferrous scrap, exceeded domestic selling prices during the quarter. Based on our outlook for the domestic market, raw material costs are not expected to increase at the same rate as export selling prices. As a result, third quarter margins are expected to expand, compared to the recently completed second quarter.

In the Steel Manufacturing Business, we haven't yet seen any signs that import activity would increase, due to the dollar impact on pricing for finished steel products. West Coast non-residential construction demand remains soft particularly in Southern California, but the overall lack of supplies expected to result in continued upward pressure on prices.

In addition, higher raw material costs, particularly for scrap, are expected to contribute to higher steel prices, as those supply conditions permit steel manufacturers to pass on a portion of these higher costs. Sales volumes are also expected to remain at fairly high levels, increasing slightly on a year-over-year basis, and could reach the record volume shipped in the second quarter. While we expect higher average selling prices during the third quarter, we don't believe we will be able to recover all of the expected increase in scrap costs.

Compared to the third quarter of last year, and narrowing to the metal spread, should result in lower margins. Compared to the recently completed second quarter, higher production points, and expenses that were incurred during that quarter for maintenance shutdown, are expected to result in the lower unit cost, and more than offset the increase in scrap cost, as a result, sequential margins should improve.

In the Auto Parts Business both on a year-over-year and sequential basis, we expect to see revenue improvements from all sources, due to higher volumes and higher prices for recycled metal, as well as improved full service parts sales. On a quarter-over-quarter basis, we also expect to see typical seasonal increases in sales service parts sale, due to the impact of more favorable weather conditions.

Let me conclude by recapping. We just completed a very strong quarter in which all of our businesses performed well. Our outlook remains optimistic, both for the third quarter, as well as the long term, we continue to be focused on maximizing the benefits from these positive market conditions in which we operate, as well as capitalizing on the competitive advantages from our export platform, investments in technology, and scale.

Operator? Let's go ahead and open up the call for questions at this time.

Ladies and Gentlemen, (OPERATOR INSTRUCTIONS) Our first question will come from the line of John Rogers with D.A. Davidson. Please proceed.

Hi, good morning and congratulations on the quarter.

Thank you, John.

First, on the scrap business, how far out are you selling now into the export market?

Well, we do sell forward, but we sell forward based on our current look at inventories, and our flows have remained very strong, so our adjustments in the timing on sales is really very minimal, and depends on how we see the market movement. We don't give specific guidance on that as you know, but we are very comfortable with where we are, and how we see the market going, and what our inventory supplies are.

Okay. And then in terms of the steel mill, I was just trying to understand the reported average prices that you saw there of $616 a ton. If you take the revenue divided by the volume, you get a number closer to over $700 a ton. I know there are some adjustments in there, but it is a bigger gap than what we have seen in the past. Was there anything else in the steel operations that contributed to the profitability or the revenue in the quarter?

Well I think other than the shutdown which of course has an affect on what our costs were during the quarter, there is also a product mix that has an effect on those average prices, and some of our products have a larger margin for us than others, so if the mix goes in that direction, then obviously that increases the margin. It is not just the tonnage. It is the mix.

Right, but in terms of the average pricing too, I mean that should be picked up in there.

Yes. We will get back to you on that, John, but I think it is really just product mix.

Okay. And then lastly, just in terms of the share repurchases, were you buying through the quarter, or given where the price is, I assume it was the early part of the quarter, and any thoughts on it? How aggressive you plan to be with the 1.7?

Well, as you know, our repurchase program is based on what we think is appropriate at the time, and it varies from quarter to quarter and we have been, we can't really predict where we are going to be with that going forward. It depends on our view of the market, and we are pleased with what we have done today.

Okay, all right well, thank you. Thanks, John.

Our next question will come from the line of Eric Glover with Canaccord Adams. Please proceed.

Congratulations on very strong results.

Thank you, Eric.

I was wondering if you could provide some color on shipping costs and ship availability within the export markets, and then more specifically, if you could provide perhaps the difference in prices on average between bulk cargo rates and containers, now say from the West Coast to Asia?

Well, I think on the shipping, we made some comments on that earlier as to what we saw both in the first quarter, and what was basically a correction in the second quarter for purposes of our business, in the sense that the availability and the price stabilization, and even dropping a bit in the second quarter helped us on shipping costs. We also have commented on the fact that there is additional tonnage supply that we see coming online, that has been commented on in various quarters, late this year and early next year, which will have an additional positive impact on our program.

We obviously do the usual things in terms of securing availability, and making certain that we have a predictable price for our product, but I think that you see that as I said earlier, sometimes the spikes in the market, which is not a steady market, sometimes those spikes take a little time to catch up, in terms of our selling prices, and they did during the second quarter.

On the container side, as we have pointed out before, in our locations the container shipping phenomenon that you see in Southern California has not been a significant factor in the market. We have taken steps to be sure that we are able to ship by container, and we do ship a small amount by container, that is really driven by our customer preferences and demand on their timing, so we are very comfortable that we can do it.

I think there has been a number of articles in the press, about how the gap between excess container costs for freight, and bulk cargo costs for freight has narrowed significantly, both in terms of the availability of containers, and also the actual price. Again, that is not a significant part of our market at this point, and I think probably is more something you see impacting the LA basin.

Okay, and then I just wanted to ask you about potential acquisitions. Is your focus now more on the Auto Parts side making acquisitions there, or is it on scrap Metal Recycling, or is it both, and then are valuations attractive or have they been moving up, given the number of deals we have seen recently?

Well, as we have seen and talked about earlier, we see a lot of opportunity for acquisition in both those business sectors. The valuation issue of course is that it has been a pretty good time for the business, both in the Auto Parts side, and in the Scrap business, so sellers tend to like to value their businesses on the basis of a short-term look at their business, rather than a medium to long term look, and that puts more of a challenge on what exactly we think is the appropriate use of our capital, and as a result, there are some that we look at, that we just don't think are appropriately priced.

There are others that we like. So I don't think that that is going to change much in the months forward here. We continue to be very active on the acquisition front, but those are not always things that we think are attractive for us.

Okay, but there is no, are you more interested on the Auto Parts side at this point?

We are more interested in where we get the best return on our capital.

Okay, thanks.

Our next question will come from the line of Bob Richard with Longbow Research. Please proceed.

Good morning and thanks for taking our call.

Oh, sure, good morning.

I appreciate your comment that the supply of scrap is strong, or your flows are strong. It is kind of contrary to what we are hearing from other yards from other companies, so that is great. Do you suspect that will tail off looking forward, or with the increased price, it may stay stable or even improve?

Well, I think as we have seen over the last year in our business, our supply flow has been very steady and increasing, and I think that we continue to see those factors working to our advantage in our business. As you know, some of the acquisitions we have made have been designed not to see that supply flow migrate to competitors, so for a whole host of reasons in our overall strategic look at the marketplace, we are very comfortable that our supply flow continues, and will continue to be very strong.

Well that is very encouraging, and one quick follow-up. Traditionally, looking at fiscal year '07, your revenue base was about 40% Asia. Based on your comments this morning, I would imagine it is a little higher than that now, or is it still in-line with that ?

Well as I mentioned, markets in Asia during the last quarter were very strong, so it is again, we don't do our look at our business on a quarterly basis. We look over the course of the year and there are quarterly variations, but during the second quarter, the percentage of material that went to Asia was probably a bit higher than that 40%, but the two highest countries to whom we shipped during the quarter were Thailand and Turkey, so there is still a significant market that is available to us in the Middle East.

Appreciate that. And refresh my memory, Thailand and Turkey here in this recent quarter, who historically had been your largest two, Korea and Japan, right?

That is about two and a half years out of date, actually. Korea and China and Taiwan were historically the Northwest part of Schnitzer's customer base.

We have in fact obviously because of our expansion but also because of our change in philosophy about sales, increased our outlook on the world to the point where we sell to about 19 different countries, and a variety of customers within those countries, so we are pretty well spread around, and we take advantage of what we see in the marketplace, to direct our sales to those areas where the market is best for us on a pricing standpoint.

Fair enough, and congratulations on a great quarter, and best of luck.

Thank you very much.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of John Flanagan with Fundamental Equities. Please proceed.

John, has the acquisition by Nucor, that large scrap company affected your business with them materially, and have you seen changes in the scrap market in the East from that acquisition?

No, not for us. Nucor of course is a customer of ours in certain regions, but fundamentally the areas of the country where are where Nucor operates, and where David Joseph operated, are not areas where it has a significant impact on our business.

Do you know, John, what was paid for David Joseph, in terms of earnings, or price to EBITDA, or whatever?

Well I don't really want to comment on that. I think the best person to answer that would be Nucor.

I will ask them.

Good.

Thanks.

Thank you.

At this time, we have no questions in the queue. I would like to turn the call back over to Mr. John Carter for final remarks. Please proceed.

Well, thank you very much for joining us this morning, and we appreciate the comments and the questions. We will look forward to talking with you again. Thanks very much.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.