Radius Recycling Inc (RDUS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Schnitzer Steel Industries first-quarter 2009 earnings conference call. My name is Michelle and I will be your coordinator for today.

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. I would now like to turn the presentation over to your host for today's call, Mr. Rob Stone, Vice President and Treasurer. Please proceed.

Good morning. Thank you. As the operator indicated, I'm Rob Stone, the Company's primary Investor Relations contact. I would like to thank everyone for taking time out of your busy schedules today to join us.

In addition to today's audio comments, we have prepared a set of slides, which you can access through our website at www.SchnitzerSteel.com.

Before we get started, I 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 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" in the Management's Discussion and Analysis section of the Company's Form 10-K for the fiscal year ended August 31, 2008 and the most recent quarterly report on Form 10-Q, which should be filed later today.

I will also emphasize the forward-looking statements made on the call, including our outlook, speak only to the information available to us as of this date, and we do not assume any obligation to update these forward-looking statements. Now, let me turn the call over to Tamara Lundgren, our Chief Executive Officer.

Thank you, Rob, and good morning. Welcome to Schnitzer Steel's fiscal 2009 first-quarter earnings webcast and conference call. I'm joined on the call by Richard Peach, our Chief Financial Officer. After our formal presentation, we will be available to answer your questions.

We put out a press release today with the details of our first-quarter results. During the quarter, market conditions in all three of our businesses weakened significantly from the fourth quarter of fiscal 2008. Both the size and the suddenness of the drop were unprecedented. Although our results show a loss, our quick reaction to the change in market conditions enabled us to generate $70 million in cash from operations and to reduce our debt levels, net of cash, by $48 million.

We believe we've taken the appropriate steps to adjust our cost structure to match the current market environment. We have cut our production output in each of our divisions to match lower customer demand and to reduce our inventories. On average, we are now operating at approximately 60% of the production levels we experienced throughout most of fiscal 2008.

We have also implemented a cost containment program that includes reducing headcount, eliminating non-essential overtime, and trimming SG&A expenses. Our full-time employee headcount has been reduced by more than 10%, and we have eliminated many more outside and temporary employees. Compared to the fourth quarter, we also made sustainable cuts in SG&A expenses.

We are continuing to implement cost containment initiatives, and together with our continuous improvement program, we expect to achieve further savings in the second quarter. We believe that we remain well-positioned to take advantage of opportunities which may arise and to react quickly when the market ultimately strengthens.

Let me now turn to a review of each of our divisions. First, the Metals Recycling Business. The worldwide financial crisis precipitated an unprecedented drop in demand, which was reflected in the first quarter, in both our sales volumes and prices. Ferrous volumes were down 22% year-over-year and 48% compared to the record volumes in the fourth quarter. Prices and volumes fell steadily from the record levels achieved during the summer months.

Our average inventory costing method results in inventory values which lagged cash purchase costs for raw materials when the market is changing in either direction. This is a normal part of the business. When the movement in prices is relatively small, the impact is generally immaterial regardless of whether prices are rising or falling.

Rapid drops, however, in prices like those we saw in the first quarter, coupled with lower sales and purchase volumes, have a much larger impact on margins. While we continue to see positive cash spreads for contracted sales, due to the lower volumes, inventory costs could not come down quickly enough to preserve profitability.

In November, contract renegotiations, delivery deferrals and contract cancellations resulted in a margins squeeze and also led to a non-cash inventory write-down of $29 million. Excluding this write-down, the division achieved positive operating income.

Moving to the next slide, quarterly revenues for the Metals Recycling Business of $401 million interrupted an eight-quarter string of consecutive increases. Year-over-year revenues were down 17% and the drop was 66% on a sequential basis.

Average net ferrous selling prices during the quarter dropped to $359 per ton from the record level of $622 per ton in the fourth quarter. Average prices for shipments in November, however, were approximately 40% lower than the average for the quarter as a whole.

Throughout the quarter, we continued to see a benefit from our export model, as the difference between export and domestic prices remained at fairly high levels. Although the difference narrowed substantially from the exceptional fourth quarter. As a result, our cash metal spreads were good, which bodes well for our profitability once we work through our inventory costing issues.

Ferrous volumes for the quarter were 779,000 tons. As we discussed earlier, volumes were impacted by a number of shipments which were either deferred into subsequent periods at the request of customers, or canceled and resold for later delivery.

Let me spend a couple of moments providing some more color on the actions we've taken to manage our way through the current downturn. We reduced our purchases by roughly 35% compared to the run rate for fiscal 2008, and we eliminated extra shifts and non-essential overtime. We have reduced full-time production and SG&A employee headcount by 14%, and eliminated a significant portion of our contractor labor as well. Non-essential discretionary spending has been curtailed.

During the quarter, we were also able to reduce SG&A spending. These cost reductions, along with the other initiatives, were put in place during the quarter and we'll see the full benefit in future quarters.

The continuous improvement program that started last year remains in place, and we are committed to achieving additional cost reductions through further operational efficiencies and cost containment actions.

It's important to note that while we have been resizing the business to reflect current demand, we have been careful to ensure that we aren't hindering our ability to respond when demand increases and market conditions improve. Our capital investment program reflects this balance as well.

One of the positives we have seen is a significant drop in export freight rates. As we have discussed in the past, we continue to believe that our ability to sell to the region of the world that provides the greatest demand at any point in time, provides us with a competitive advantage compared to those competitors whose range is more limited.

The decline in ocean-going freight rates, while indicative of reduced demand for commodities around the world, has been helpful, both in terms of cost and availability. While we don't count on the current very low rates to hold indefinitely, we also do not expect the kind of rapid increases we saw last year in response to demand-driven capacity constraints.

Let's talk about our outlook for the Metals Recycling Business for the second quarter. Ferrous price levels are not dissimilar to those achieved in 2006 and the first half of 2007. Nonferrous prices appear to have stabilized, albeit at levels lower than the second quarter of fiscal 2008. Ferrous volumes should approximate the volumes shipped in the second quarter of last year, or roughly about 1.1 million tons. These volumes are from the first quarter, primarily due to the impact of shipments that were deferred or canceled and resold.

At this point, overall demand, while clearly not as strong as a year ago, has picked up from the first quarter. In fact, the availability of recycled scrap appears to be more of the constraint on sales volume right now than demand. That's one of the near-term factors we're seeing which should help to keep prices close to current levels.

Nonferrous volumes should be down 10% to 20% from the second quarter of last year. Our cost containment efforts are expected to contribute to positive second-quarter operating margins. However, accounting costs will lag our cash costs and our margins will be impacted. The lower prices that we're receiving right now for the mixed nonferrous metals that come out of our shredding and sorting processes will also contribute to year-over-year lower margins.

We expect that once the inventory cost issues are behind us, the actions we've taken to alter our cost structure for the current supply and demand levels will produce margins comparable to those achieved at similar prices in the past, particularly during the 2006 and 2007 timeframe. During that time period, the Metals Recycling Business returned quarterly operating income of between $22 and $62 per ton, with an average of approximately $38 per ton.

Now, let's take a look at the Auto Parts Business. Our Auto Parts operation was negatively impacted by the market conditions in the first quarter. Selling prices for scrap vehicles and cores, which are both heavily dependent upon market prices for recycled metal, fell significantly. As prices fell, the flow of scrap vehicles available for purchase temporarily fell as well. Although we were able to adjust our buy prices to maintain positive metal spreads, due to the effect of average inventory costing, our margins were negative.

Our self-service business model requires a minimum amount of scrap vehicle purchases to maintain part sales. With supply temporarily slowing, the drop in purchase prices lagged the drop in recycled metal prices in general and our metal spreads were not as wide as we would have seen at similar price levels in the past.

The good news, however, is that our self-service part sales were up year-over-year, which may be an indicator of the economic environment, as people look for lower-cost sources to keep their cars running. However, offsetting this, full-service parts sales were down, which is consistent with trends in the professional repair market as customers are driving less and deferring discretionary repairs.

Moving to the next slide, auto parts revenues for the quarter were down 35% from the record levels in the fourth quarter, and down 7% year over year. The lower revenues are primarily related to lower prices for scrap and cores and lower volumes. Our scrap vehicle purchases were at the lowest level since early in fiscal 2007. This reflects lower end demand as well as a temporary reduction in supply due to the lower prices.

The operating loss of $9 million was due to the weak market conditions, the impact of prices for cores and scrap, which fell more quickly than inventory costs, and lower demand for full-service parts.

The Auto business has also been focused on taking actions appropriate to the current market environment. When the market for scrap vehicles changed, we reacted by cutting our purchases 16% from the 2008 run rate and 22% from the fourth quarter. We also reduced purchase costs to maintain positive cash metal spreads. We reduced full-time employees by 9% and overall headcount by 17%, including contractor labor, which we had utilized to handle the surge of vehicles in the second half of fiscal 2008.

Through our cost containment program, we further consolidated infrastructure and curtailed discretionary spending, and we were able to reduce SG&A expenses during the quarter. We should see the full benefit of these reductions in future quarters.

Now, let's talk about the second-quarter outlook for the Auto Parts Business. Overall revenues in the Auto Parts Business are expected to down 20% to 25% compared to the second quarter of last year. We expect that continued year-over-year improvements in self-service parts sales will be more than offset by lower prices for cores and scrap, as well as lower car volumes, due to reduced availability of scrap vehicles. In addition, full-service parts sales will remain impacted by the economic downturn as people defer repairs of vehicles damaged in minor accidents.

The Auto Parts Business is expected to be impacted by lagging inventory costs, which, when combined with lower full-service parts sales, will result in negative operating margins for the quarter. We are optimistic, however, about the longer-term margin outlook for the Auto Parts Business once inventory costing issues are behind us. However, it will take another quarter for this business to reach margin levels comparable to those achieved in similar market conditions in the past.

Finally, let's take a look at our Steel Manufacturing Business. As with our other two divisions, demand fell sharply during the quarter with sales volumes of 98,000 tons. In the early part of the quarter, sales prices held up for the demand that existed at the time. In November, however, pricing fell over $200 a ton for all long products in the face of continued weak demand. Over the course of the quarter, we reduced production to enable us to meet expected demand and to manage our inventories.

The price drop that occurred in November had an impact on our outlook for sales for the second quarter, and when combined with the higher cost inventory, resulted in recognition of a $32 million noncash inventory write-down. Absent the write-down, the division generated positive operating income.

Revenues for the quarter were $99 million, equivalent to the second quarter of 2007, despite fairly high average prices. Compared to the first quarter of last year, the 10% decline in revenues was due to a 44% drop in sales volumes, which offset the higher average prices.

Our cost containment strategy for the Steel Manufacturing Business has been focused on reducing finished goods production and managing inventory levels. During the quarter, the Steel Manufacturing Business also reduced headcount by 15%, eliminated nonessential overtime, adjusted shift schedules to meet lower production levels, and reduced SG&A.

The outlook for the second quarter in the Steel Manufacturing Business continues to reflect weak demand and the impact of historically low production levels. Based on what we see today, pricing for the quarter is expected to be lower than the second quarter of fiscal 2008, as well as during the recently completed first quarter. Sales volumes are expected to the approximately 60% less than in the second quarter of fiscal 2008, and down 20% from the volumes in the first quarter of fiscal 2009.

Expenses related to planned downtime and low production volumes are expected to result in negative margins for the quarter. Our cost containment efforts are expected to contribute to positive margins after production is restored to levels consistent with expected customer demand.

Let me turn the call over now to Richard Peach to provide some more color on the financials for the quarter. Richard?

Thank you, Tamara. First I will provide more color on the first-quarter inventory write-downs and then talk about our free cash flow, our working capital and then our capital structure.

As explained earlier, our first-quarter results include a non-cash inventory write-down of $52 million. Although we have reduced our cash purchase costs for inventory, the write-downs have arisen due to selling prices declining at a faster rate from the reduction in our average costs. The inventory write-downs in both the Metals Recycling Business and the Steel Manufacturing Business were triggered in November by changes in the market, which reduced the anticipated future selling prices for scrap and finished steel products. The calculation of these inventory write-downs considers all available information until we announce our results, including completed shipments since the quarter end, freight costs, the current status of our sales order book, and current market prices for our products.

The total write-down of $52 million is net of the elimination of intercompany profit on sales of scrap by the Metals Recycling Business to our steel mill, which we do not recognize until the inventory is sold to external customers.

As stated earlier, our first-quarter operating cash flows were positive $70 million, which contributed to the reduction in our net debt. This positive cash flow arose from two main factors. First, the impact of positive cash metal spreads and cost containment, which can be seen when we add back the non-cash depreciation and the inventory write-downs to our reports net loss. The second factor was the expected reduction in working capital, which we will explain in the next slide.

Free cash flow of $51 million also reflected capital expenditures of $90 million, which were less than our quarterly run rate in fiscal 2008. In line with our annual depreciation, we plan to invest a further $30 million to $40 million in capital improvement projects during the remainder of the fiscal year.

Our working capital at the end of the first quarter was $338 million, which consisted of $109 million of receivables and $329 million of inventory, offset by $154 million in current liabilities, mainly accounts payable.

Working capital is down $97 million since our fiscal year end. This included the $52 million inventory write-down but also reflects collection of receivables from previous sales at higher prices, and the impact of lower scrap purchase costs on both our inventories and our payables. We expected decreases in our inventory volumes will further benefit our working capital position in the second quarter.

As a result of the positive cash flows, our leverage has reduced with a net debt to total capital ratio of just over 11% at the end of our first quarter. Net debt was $121 million, representing a reduction of $48 million since our fiscal year end. We also have additional borrowing capacity through our committed $450 million revolving credit agreement led by Bank of America. As of November 30, $353 million remained available to draw on that line. The term of the revolver doesn't expire until 2012, and we are in full compliance with our debt covenants.

Finally, although there were no share repurchases during the quarter, our Board recently approved an increase in the shares authorized for repurchase by $3 million, which means that we now have a total of 4.5 million shares available for repurchase under existing authorization.

Let me now turn the call back to Tamara.

Thanks, Richard. We just completed a quarter which reflected unprecedented drops in both demand and absolute prices. As we have during strong markets, we continue to focus on managing our purchases and maintaining positive metal spreads. When the markets were stronger, we worked to maximize the benefits from positive market conditions by optimizing throughput, and operating efficiently. In the current environment, we have reduced our output to reflect the realities of softer demands and we're taking actions to ensure that our cost structure is appropriate to the new market conditions. We believe that our strong cash flow and our low leverage balance sheet, together with the cost containment actions we have taken and are continuing to undertake, will enable us to operate successfully in this market and to take advantage of opportunities which may arise for profitable growth.

We're now ready to take your questions.

(Operator Instructions). John Rogers, D.A. Davidson.

First of all, on the scrap side of the business, how far out are you selling product now?

Well, we are continuing -- as you know, we sell our scrap forward typically 30 to 90 days and we are continuing to sell within that same timeframe.

Okay. And on the steel side of the business, given the state of the current market -- I guess this applies to the Auto Parts Business as well -- in this current pricing environment, can you get cost down enough to get it back to breakeven? Or do you need a better market?

Well, we, again, John, as you know in our business, we are a high variable cost structure business. And the highest cost is the cost of raw materials. And it by far exceeds the second and third and fourth-level cost.

Sure, sure.

So that's where our first focus is. And we do believe that in both of those businesses, that as we work through our higher cost inventory amounts, that that will probably take the Auto Parts Business another quarter to get through.

And with the Steel business, there is a -- the focus is more on production levels once we get the costs down.

But given the spread between what you are selling at and the roughly -- was it $200 scrap, I guess I'm just in with reduced volumes, you think you can get the steel business back to breakeven at least? Is that fair?

I didn't follow what your --?

Well, I mean given where scrap prices are now, and steel prices are --?

Given where scrap prices are and steel prices are now, they're probably right at the precipice, right? Steel prices need to increase or scrap prices need to decrease. And we see strengthening in scrap prices occurring right now.

What we see happening is that when volumes equal demand, we can make money. And we've been managing our inventories and reducing our production levels at this point to get that balance between inventories, production and customer demand in line. And we anticipate, as I said in my remarks, that we're going to get there in the second half of the year.

Okay, great. Thank you.

Eric Glover, Canaccord Capital.

Good morning. You had mentioned that scrap demand has picked up. I wonder if you could first, identify any particular destinations where you're seeing that overseas. And then secondly, do you think the buying has been driven more by simply inventory replenishment or has there been an actual pick-up in demand?

Those are two good questions, Eric, so thank you. The demand we're seeing is occurring on both coasts. The demand pick-up, the price strengthening, we're seeing occur on both coasts. So that's positive.

Your question regarding is this really sustainable growth, or is it, we call sort of selling pocket demand is not clear. What we look for and you and I have discussed in the past, is really a return of credit to the market, a return of confidence to the market, and a return of the ability to invest in fixed assets. And so there's clearly an inventory restocking going on, and there is clearly a buying focus of, it's more just-in-time for this market that we haven't seen in the past. And we and our customers are watching for the sustainable build. But it's not clear at this point whether it is just inventory restocking or sustainable stronger demand.

Okay, thanks. And then Richard, I missed your guidance for the CapEx for fiscal 2009, and how does that compare with any previous guidance?

Well, we're going to the -- what we have said is we spent $19 million in the first quarter, and we expect to spend a further $30 million to $40 million in the remainder of the year. Therefore, our total capital expenditure will be broadly in line with what we expect our annual depreciation to be for the year. And that will be significantly less than last year's capital expenditure.

Okay. Thanks.

Timna Tanners, UBS.

Good morning. To follow up with John's question, maybe a different way, to ask about the steel mill side is, is there a breakeven utilization that you can identify for the mill?

Well, what you are currently seeing in terms of how we've guided to our outlook, is that we are obviously running at below breakeven into the beginning of a second quarter. We expect to produce, during the second quarter, really a little bit more than one-third of the run rate for 2008, with production toward the end of the quarter higher than at the beginning. So given our guidance for the loss during the quarter, our breakeven would be at higher volume levels. But as I said to John in answer to his question, that expected customer demand going forward will allow us to produce at levels which will be profitable.

Okay. If you were able to identify a number, that will be useful. Some other companies have. And then, just to clarify on the Auto Parts Business, you said it will take another quarter before profitability. Is that applying to the second quarter? Or are you talking about beyond that?

No, I mean, I think we've said toward the -- at the end of the second quarter, we should have worked through our inventory costing issues there.

Okay, thank you. How much would volumes have been roughly without the impact of some of the delayed cargoes from Q1 spilling over into Q2? So absent some of that phenomenon, what do you think the run rate is for shipments in your scrap business?

I guess probably the way to look at it, Timna, would be to take our Q1 volumes and our Q2 forecasted volumes and average them.

Okay. That's helpful. Do you expect that there will be further cancellation delays that we should consider, or you think that's a lot behind you?

I think that's behind us.

Okay. There's been some concern about scrap availability in the more premium grades given manufacturing slowing down. Can you talk a little bit about what you might be seeing there and any concerns you might have there?

Well, it's a good question on scrap availability because we see a lot of different impacts to that.

One has been weather. This time of year, we always see weather impacts. But clearly we're seeing impacts as a result of reduced manufacturing volumes. We're seeing impacts that are even reflective of reduced auto sales, which means that cars are staying on the road longer and we are seeing less flow there. And we're seeing reductions as well from the construction demolition industry. Because we are seeing less demolition than we have seen in the past.

So scrap availability is less than what it has been in the past. And the beginning drive down was a function of the price drop where we thought people were holding back scrap in an effort to, or in anticipation of an increase in prices. But now we think it's much more a function of the economic environment.

One thing that you need to remember though is that manufacturing grade scrap doesn't really affect us that much in terms of where we operate in the Northwest, in the Northeast and a little bit in the Southeast, obviously, is where the effect is.

Okay, fair enough. Last question. If you could try to quantify -- I think I've asked you this before. I know it's a tough question. But can you try to quantify the move in scrap lately as how much would be attributed to raw demand and how much might be attributed to this reduction in supply, not just from the manufacturing side, but from some of the peddlers and other sources?

No, we don't -- you have asked us that in the past and there really isn't a way for us to respond to that.

Would it be maybe half and half? Or do you think it's all demand driven? Or can you give us just a rough discussion?

I really can't. We really can't.

Okay, thank you.

Sal Tharani, Goldman Sachs.

Can you -- you mentioned that the production at the mill will rise -- or utilization will rise through the quarter, second quarter. Is that because of the inventory destocking coming to an end or is it there is some real demand or final demand increasing?

Yes, it is what you anticipated. It's the inventory rundown and our ability to increase production.

And that's the inventory at your facility?

Correct. It's moving through the higher-priced inventory and selling that down and then increasing production to meet ongoing customer demand.

Okay. And in terms of steel demand, is there any improvement? And what is the change between let's say November and December? Has that been getting worse or is getting stable at a lower level?

Is what stable?

Okay. And on the pricing, you mentioned the November prices dropped $200. Since then, have you seen pricing continue to drop?

I'm sorry, you broke up.

You mentioned that the prices dropped in November by $200 a ton and across all loan products. How have the prices done since then or in the last few weeks? Have the prices been stable or have they still continued to decline?

No, we have seen them stabilize.

With the scrap moving up, do you think prices can actually go up on the long products?

That's a function of demand. But we are seeing strengthening in scrap prices over the course of the last few weeks.

Great. Thank you very much.

Thank you.

(Operator Instructions).

All right. Thank you all for dialing in this morning, and we look forward to speaking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.