Radius Recycling Inc (RDUS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Schnitzer Steel second-quarter 2013 earnings release conference call. At this time all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the call over to your host Alexandra Deignan, Vice President Investor Relations. Please begin.

Thank you, Sean. Good morning, everyone. Welcome to Schnitzer's second-quarter fiscal 2013 earnings presentation. We are glad you are able to join us today. In addition to today's audio comments, we have a prepared set of slides that you can access on our website at www.SchnitzerSteel.com or www.SCHN.com.

Before we get started let me call your attention to the detailed Safe Harbor statements on slide 2, which are also included in our press release of today and in the Company's most recent Form 10-K and in the Form 10-Q which will be filed later today. These statements in summary say that in spite of management's good-faith current opinion on various forward-looking matters, circumstances can change and not everything we think will happen always happens.

Please note that we will discussing some non-GAAP measures during our presentation today. We've included a reconciliation of those metrics to GAAP in the appendix to our slide presentation. Now let me turn the call over to Tamara Lundgren, our Chief Executive Officer. She will host the call today with Richard Peach, our Chief Financial Officer.

Thanks, Ally. Good morning, everyone, and welcome to our call. This morning we will review our second-quarter results. I will summarize our consolidated performance and I'll provide some commentary on the activities and market trends that drove our improved results this quarter. Richard will provide the segment financials and review our capital structure and then we'll open up the call for Q&A.

This morning we reported second-quarter adjusted earnings per share of $0.36 reflecting higher volumes, higher prices, improved margins and lower cost. Our results exceeded the market outlook that we issued in February and this was a result of three primary factors.

The first factor was better than anticipated operational performance in both our Metals Recycling and Auto Parts divisions including lower costs. The second factor was lower corporate expenses as a result of our restructuring initiatives. And the third factor was the positive impact from additional tax benefits.

From a market perspective, as we highlighted in our outlook, we experienced stronger demand for our products which led to higher sales volumes and higher prices. In our Metals Recycling Business we more than doubled our operating income per ton to $13 from the prior quarter. In our Auto Parts Business we delivered higher offering margins sequentially excluding the impact from the start up of our 10 new locations. And in our Steel Manufacturing Business we stayed profitable notwithstanding lower utilization due to seasonality and planned maintenance down time.

From a cost perspective through the first half of our fiscal 2013 the restructuring initiatives that we announced at the start of our fiscal year have so far delivered an 11% reduction in SG&A year over year. Our cash flow enables us to continue to pursue growth and the return of capital to our shareholders through our attractive dividend while maintaining a healthy balance sheet and low leverage.

During the quarter we invested in 10 new sites in our Auto Parts Business in order to strengthen our supply-chain of raw materials to our Metals Recycling Business and to enhance our APB franchise. We also began initial operation of our shredder in Western Canada to enable us to export directly from British Columbia.

As 2013 progresses we will continue to focus on the areas that we can control and that will position us to deliver improved performance when the macroeconomic environment improves. Those areas are the same areas that underpin this quarter's results -- continuous improvement in our operations, including generating cross divisional synergies between MRB and APB; optimizing our cost base; generating strong cash flow in order to maintain a healthy balance sheet; and investing in our supply chain.

So now let's turn to slide 5 to review the financial highlights of our second quarter. From an operational perspective we generated a 43% improvement in EBITDA while revenues increased 12%. The significant improvement in our EBITDA margin versus the first quarter was primarily driven by rising commodity prices, higher sales volumes and lower cost.

In our Metals Recycling Business average ferrous export selling prices, average prices strengthened approximately $40 per ton from the end of the first quarter to the end of the second quarter and ferrous sales volumes for Q2 as a whole increased 16%. Average nonferrous selling prices were slightly higher in Q2 versus Q1 and nonferrous sales volumes increased 6%.

The scrap market continues to be impacted by two trends. One trend, the first trend is lower availability of raw material due to weak US growth and the second trend is the low inventories of processed scrapped held by customers. The intersection of these two trends creates a volatile market since small upticks and demand, whether those upticks are caused by restocking or by real demand, can result in large price swings.

In the Auto Parts Business the second quarter is typically a weaker quarter due to the impact of winter weather on our retail customer traffic. However, this year APB's Q2 results were stronger than Q1. We saw a good pick up in car purchase volumes, about half of which came from the new store acquisitions which we made during the quarter. In addition, APB benefited from stronger ferrous and nonferrous commodity prices.

In the Steel Manufacturing Business sales volumes were lower during the quarter due to lower seasonal demand and planned maintenance as well as the competitive impact from imports of finished products. On a longer-term basis, however, SMB is well-positioned to benefit from the improving trends for long products on the West Coast.

So now let's turn to slide 6 and we can review the ferrous export markets during Q2. As you can see on this slide, our higher sales volumes in Q2 versus Q1 were largely driven by an increase in demand from Asia. During the quarter we exported 85% of our external ferrous sales. Our total ferrous and nonferrous export sales were shipped to 14 countries. Turkey, China, and South Korea were our top ferrous export destinations, and for nonferrous products China, the US and South Korea remained our top destinations.

Now turning to slide 7, I will wrap up my initial remarks with some comments on market trends. We are only one month into our third quarter. We can report that the higher export prices that we saw in February did hold steady for March shipments. Domestic prices increased significantly in March and recent published reports indicate a potential softening for April domestic prices. As a result we've seen moderating demand for April export shipments as the export markets watch for the April domestic prices to settle.

Month-to-month volatility is not unusual in the scrap market. The difference since the global financial crisis is that the movements have become sharper due to constrained raw scrap supplies, due to lower scrap inventories held by Mills, and due to overcapacity And global steel manufacturing which puts pressure on prices for finished goods.

While absolute scrap prices are relatively high by historical standards, the constrained supply of scrap means that purchase prices do not move as quickly as sales prices. Our focus therefore continues to be on the areas that we can control -- our cost, our business processes and continuous improvement; the expansion of our scrap supply chain through our strategic growth initiatives; and our cash flow generation to maintain our strong balance sheet and our ability to return capital to our shareholders.

So, for example, as a result of our MRB/APB coordinated growth strategy we now have 17 Metals Recycling and Auto Parts locations in Western Canada in various stages of development. Expanding in Western Canada will allow us to strengthen our supply-chain and to grow both our Metals Recycling and Auto Parts Businesses in a region where our products and services have not been available before.

And while we have been pursuing this initiative we are continuing to keep our eye on the ball as it relates to our restructuring program. We have already achieved sizable savings and we continue to be heavily focused on capturing internal synergies among our divisions so that we can deliver improving margins and create a strong foundation for further margin expansion when the markets do strengthen.

So now, let me turn it over to Richard to provide a review of our segment performance and our capital structure.

Thank you, Tamara, and good morning. I will begin on slide 8 with Metals Recycling. Operating income for Metals Recycling was $14 million which was more than double the first quarter. Operating income per ferrous ton was $13 representing a sequential increase of 117%.

The key drivers of the improved second-quarter performance were significantly improved sales volumes, higher ferrous selling prices and benefits from the timing of sales. These results were also better than our MRB market outlook because both cost of goods sold and SG&A in the month of February were lower than our expectations.

Compared to the first quarter ferrous sales volumes of 1.1 million tons increased sequentially by 16%, primarily reflecting higher export demand on the West Coast and timing of shipments. Export shipments off the East Coast were also up sequentially but more moderately.

Due to higher levels of production nonferrous sales volumes were also up sequentially by 6% and amounted to 126 million pounds. Compared to the previous quarter average ferrous selling prices were up by 4% and nonferrous selling prices were up by 2%.

Although the second quarter represented a significant performance improvement, our reported margins are still compressed compared to historical levels as a consequence of supply constraints over Raw Materials and the impact of macro uncertainties on the strength of demand.

Now moving to our Auto Parts Business, please turn to slide 9. On a sequential basis second-quarter car purchase volumes increased significantly by 11%. Just more than half of the increase came from existing stores with the remainder coming from immediate contributions by our new locations that we acquired in the second quarter.

The increased car volumes, higher commodity prices and lower SG&A all drove a sequential increase in APB's operating margins to 11% excluding the impact of new stores. APB's performance also exceeded our market outlook due to lower SG&A and benefits to gross margins from higher commodity prices in the month of February.

During the second quarter we acquired an additional eight stores and began development on two greenfield locations. Including transaction integration and start-up costs APB incurred $2 million of operating losses on these new sites which lowered APB's reported operating margin to 9%. In the third quarter we expect to incur a similar level of start-up costs on these new locations as we convert some acquired stores to self-service facilities and develop our greenfield locations.

In total APB now has 59 stores which are operational and two more are planned to be opened by our fiscal year end. This represents a 20% increase in stores from the beginning of the fiscal year and we expect an increase in annualized car purchase volumes of 15% after our integration is completed.

Now turn to slide 10 for a review of our Steel Manufacturing Business. In the second quarter Steel Manufacturing generated $1 million of operating income on rolling mill utilization of 63%. Compared to the first-quarter sales volumes declined 26% to 96,000 tons mainly as a result of seasonably low demand and scheduled plant down time.

However, year-to-date we've had a 20% pick up in rebar sales on strengthening market demand and advance of the construction season. Average net sales prices of $690 per ton approximated the first quarter but were lower than the second quarter of last year due to the impact on selling prices of decreases in the cost of raw materials.

Now moving to slide 11, I will review some of the key corporate items during the second quarter. In August 2012 we announced an aggressive cost reduction program and a major corporate restructuring initiative. As a consequence SG&A in the first half of our fiscal 2013 is 11% lower than the same period of the prior fiscal year.

Our focus on cost efficiency is ongoing and we remain on track to achieve our annualized target of $25 million of pre-tax savings through a combination of production and administrative cost reductions.

Second-quarter tax expense included the release of a $2 million valuation allowance on the deferred tax assets of a Canadian subsidiary. This reversed the valuation allowance recorded in the first quarter and was driven by steps we are taking to create more operating synergies between MRB and APB in Canada and plans to implement a new Canadian tax structure which will be more tax efficient.

In addition, the second quarter also includes $1 million in other discrete tax benefits including qualifying manufacturing deductions and credits for research and development activities.

In the second quarter we also performed an annual goodwill test and determined that the fair value of both our MRB and APB operating segments exceeded their carrying value. As part of our normal process we will continue to closely monitor our goodwill in light of macroeconomics uncertainties, financial performance, our market capitalization and market conditions in the recycling industry.

Now let's turn to a review of our capital structure on slide 12. During the second quarter net debt increased by $36 million which equates to leverage of 25%. We generated positive cash from operations of $16 million which in part funded our investment in new Auto Parts locations for $23 million and capital expenditures of $21 million including the Canadian shredder project.

For 2013 as a whole we anticipate total capital spend of up to $100 million including capital expenditures related to the new APB acquisitions and development of greenfield sites.

In the second quarter we continued to make significant progress on our strategic growth plan in Western Canada. The combination of APB's four new sites acquired in Vancouver BC and the successful completion of testing of the new MRB shredder in the same region will allow for additional synergies between these two businesses.

We took further strategic actions subsequent to the second quarter as we acquired all of the non-controlling interest in one of MRB's Canadian subsidiaries for a total consideration of $25 million.

In summary, we believe Western Canada offers a good opportunity for Schnitzer to continue its growth strategy and for synergistic benefits between our MRB and APB divisions. Now I will turn the call back over to Tamara to conclude our formal remarks.

Thanks, Richard. Our second-quarter performance is indicative of the operational leverage we are harnessing with our restructuring initiatives and our strong focus on costs, business processes and continuous improvements as well as the strategic growth initiatives we are actively pursuing.

We achieved significant margin expansion on higher commodity prices and improvements in volumes in both our Metals Recycling and Auto Parts Businesses during the second quarter. In addition, our Steel Manufacturing Business maintained profitability despite a material reduction in volumes due to seasonality and planned down time.

We continue to make targeted investments in our core businesses to drive profitability and growth. In MRB we are driving operational efficiencies while developing a new franchise. In APB we are expanding our stores through acquisitions and greenfield developments.

Both of these initiatives enable us to further penetrate core markets, leverage existing operational resources and increase our supply chain. And in our Steel Manufacturing business we continue to optimize performance and to position our mill to benefit from improving trends for long products on the West Coast.

We are on track with our restructuring initiatives and we will continue to assess adjustments to our cost base to reflect the current market environment. The global economic outlook remains challenging in the near term, but we believe the long-term fundamentals of our market remain intact.

Broad-based demand for recycled metals continues to be driven by increasing production levels for finished steel and underpinned by long-term trends in urbanization, infrastructure development, energy efficiency and reductions in greenhouse gas emissions.

While we see some early indications of economic recovery and stability in the US and in the markets where we export our products, near-term headwinds are affecting the availability of scrap supply and the global demand for steel.

Our strategy is focused on the areas we can control -- market leadership and operational excellence in each of our businesses; delivering sustainable cost reductions; enhancing inter-divisional synergies; executing on growth initiatives within the strategic parameters of our core business; maintaining a strong balance sheet and returning capital to our shareholders. So now, operator, let's open up the call for some Q&A.

(Operator Instructions). Brent Thielman, D.A. Davidson.

Just on the Auto Parts Business, it looks like a little over a 200 basis point drag on margins related to the new site. Sorry if I missed this, but should this drag narrow in the coming quarters or is this about what you would expect over the near term?

Hi, Brent, it's Richard. It will narrow, but we will see in the third quarter something similar in terms of start-up costs in Auto Parts because we are converting some of the acquired stores to self service facilities and we are also developing our new greenfield locations.

So we do have some costs associated with labor, supplies, building of inventory and the customer base in those locations. But that will quickly weigh out the system. And as we said, we do expect after the integration is completed that we will see an increase in Auto Parts car purchase volumes by around 15% on an annualized basis.

Okay. And sorry, Richard, the greenfield sites will be up and going by Q4, did I hear that right?

Correct.

Okay and then just on the steel business, can you just give us an update on the environment and opportunities you are seeing there right now?

Well, we are seeing strengthening of construction demand on the West Coast. And so it's interesting, this second quarter was the first second quarter that the Steel Manufacturing Business was profitable since the onset of the global financial crisis. So we are seeing the green shoots of construction demand strengthen on the West Coast and we think the mill is well-positioned to benefit from that as that takes hold.

And then just last one, the remaining $5 million in restructuring costs, is that going to be fairly spread out in the second half or weighted toward Q3, any sense there?

It will be spread over both Q3 and Q4, Brent. I don't have the exact split to hand here, but it all should be going through by the end of the fiscal year.

Thanks, good luck in the quarter.

Thank you.

Luke Folta, Jefferies.

I guess quickly first on the restructuring efforts, can you talk about how much of that on a run rate basis, kind of excluding the up-front costs, you think you've achieved in the second quarter? And then how that -- some sense of how that breaks out on the segment reporting side?

Yes. Hi, Luke, it's Richard. There is $25 million of pre-tax savings that we are going for on an annualized basis. And of that amount, half of it is in the Metals Recycling Business and the other half is split roughly equally between Auto Parts and Corporate.

And we did see when we announced this back in August that as the initiatives were taking place throughout fiscal 2013 that we would see a part year benefit in this current fiscal year. We also said in terms of the split of the $25 million that $18 million was in SG&A on an annualized basis and about $7 million was in production costs which are in cost of goods sold.

So if you stand back and you look at our SG&A for the first half of this fiscal year we have spent $97 million which is actually $11 million less than we had spent at the same time in fiscal 2012. So we are on a good run rate to obtain a substantial portion of these full-year savings in this current year. I think we won't get all the $25 million this year but we will get a significant portion of it.

And now one other thing to say here -- in terms of looking at Metals Recycling, that $12 million that we are going for in there, if you look at that on a per ton basis, on an annualized basis when we have achieved the full run rate, that's about $3 a ton there. So it is making a significant difference to our current earnings and future earnings.

And in the Auto Parts Business, if their half of the remaining part of the $25 million then, the $6 million or $7 million we are aiming for in there, is up to a couple hundred basis points onto their operating margin. So they are material to the performance of the businesses especially in this current market environment.

So it sounds like you are actually tracking ahead of where you thought you would be when you announced the restructuring. I guess where I am trying to get (multiple speakers).

We are very much on track with it. We are very much on track with it, but we are aggressively pursuing our cost reduction program.

Okay, so when we look at just the second-quarter results, if we wanted to use that kind of as a base, has the things that you have done -- is that now fully reflected in that second-quarter number kind of on a run rate basis?

Well, a little bit more -- there's a little bit more still to do. We have implemented a substantial portion of it and you can see if you took the $97 million of SG&A for the first half of the fiscal year and you doubled it and then took a little bit off that and that would give you a decent estimate I think of where SG&A could end up for the year as a whole.

Okay. All right, and then you said a number of things regarding Canada. And Tamara, you said something about 17 facilities being kind of newer or something involving your strategy there and then there is a new shredder coming online and there are some new Auto Parts facilities there.

Can you maybe just step back and give us kind of an overview of what is going on in Canada these days and kind of what it is going to look like when all that stuff is kind of ramped up? What do you expect the benefit to be from that shredder in terms of tonnage or I guess anything that you could say to help put that in perspective, that whole strategy up there.

Well, what we are trying to do there is to create a differentiated buying and operating strategy where we take a base of business that we have had in the Auto Parts Business, Auto Parts Business has been in Western Canada for quite a number of years, and we grow that business as a supply chain into the Metals Recycling Business where we are putting up a shredder.

And actually just this last quarter the first export of shredded material from British Columbia, in British Columbia's history, took place. So what we are trying to do is to create an integrated structure up there. Canada has got a good GDP outlook, it's a growing economy and it is a place where the products and services that we have -- that we undertake and do in the US doesn't take place there.

So the 17 facilities are a combination of Auto Parts facilities, feeder yards and our shredder. We haven't broken out, and you know that we don't break out tons per shredder so we can't disclose that. But from a strategic perspective we are looking to create a true integrated franchise not dissimilar to the integrated franchise that we have, for example, on the West Coast between APB and MRB.

Okay can you give us some sense at the end of say fiscal 2013 how many facilities you will have or how much -- some sense of volume and how much volume you will be processing, whatever, in Canada as a whole or in that region as a whole relative to the end of fiscal 2012?

Yes, I think we said somewhere in our release that we have got around 17 facilities in Canada split between the Metals Recycling Business and the Auto Parts Business. So we are creating a substantial operation up there.

In terms of volumes I think in the current fiscal year it will be between 5% to 7% of the Metals Recycling volumes for the year. So it is not very significantly material to the business as yet, but we think it is a very good growth opportunity for us in the future given the network we're establishing up there and the new shredder and export capability.

Okay and if I could sneak one more in too, just on the steel side you had talked about some improvement in the West Coast, Commercial Metals the other day kind of a saying the same thing, that they're starting to see some improvement in California as well.

Are you seeing that in your backlogs? So should we see kind of a marked improvement when we look at the steel shipments in the spring construction period over the next couple quarters relative to last year?

Well the spring activity hasn't really taken place yet, but construction activity in the spring -- I mean the season that we are going into right now tends to be the strongest. And we are seeing order books strengthen from our customers, but we don't operate on a backlog basis. So this is really a function of seven months of strong ABI performance, input from our customers that indicate high bidding activity and the pickup that we have seen in rebar sales.

Thank you very much.

You're welcome.

Timna Tanners, Bank of America-Merrill Lynch.

I just had a couple questions. One is really in the past what we have seen is that from quarter to quarter there would be sharp variations in EBIT per ton in the Metals Recycling Business. Sometimes you would under earn, sometimes you would over earn, sometimes it would be more of a normal environment.

So taking aside what you are expecting to do in terms of what you can control on the cost cutting, how would you characterize the second-quarter's earnings per ton on Metals Recycling?

Well, I think if you look at the market demand, if you look at the price and volume you saw a modestly improving [tone] which is what we suggested in our January call. And that was fundamentally a combination of steadier market sentiment and more opportunities internally to generate synergies and savings.

So we still have a situation where customers worldwide are keeping low inventories and that can cause the market to spike. We are seeing product delivery requests and that continued low inventory that still reflects probably relatively weak long-term confidence.

Okay but for the recent environment this is about a good run rate for earnings you think for the recycling business absent a better GDP environment, et cetera?

Well, we don't project margins going forward or volumes or prices obviously. But clearly what you can see here is that in a rising -- higher volumes, rising prices, we accelerate very quickly. And that was a very different tone and level of activity than what you saw in the first quarter.

Okay, when I look at your balance sheet as far as leverage goes and ratios, this is about the higher end of your usual comfort zone as far as I've seen historically. So I just wonder if you could characterize kind of your appetite for uses of cash or kind of your priorities for cash use going forward, please.

Sure. We have actually been higher, I mean toward the end of I think last year we were at 30% or even a little bit higher than 30%. So we are down significantly from that after making a lot of investments in acquisitions and in CapEx. But our uses of a capital are split over growth opportunities between acquisitions and CapEx and our dividend and return of capital through opportunistic share repurchases.

So this is a comfort level. Can you just remind us of what comfortable level you might be at net debt to equity or another metric that you might use?

Well, we don't set targets, but we range -- I think within the law last year and a half -- and, Richard, you can correct me -- but I think we have ranged within the last let's say 18 months to two years between 18% and 30%.

That's correct.

For net debt to equity, yes?

Yes, for net debt, yes -- net debt to equity.

Okay. All right, thank you.

Chris Haberlin, Davenport & Company.

I wanted to see if you could maybe comment on what you are seeing in terms of export demand just given the stronger dollar here recently? I know that you mentioned that you are seeing some moderating demand in April for export shipments just given expectations on pricing. Can you kind of provide a little bit more color there?

Sure. March -- you look at the East Coast and West Coast, the East Coast focuses -- East Coast export market focuses very heavily on what goes on in the domestic market and the West Coast looks at it as well. And in March what you saw was a significant uptick in domestic prices. And then during the month of March you saw capacity utilization decline in the US. And that typically in this month was -- last month was no different, starts a fair amount of chatter about lower prices the next month.

And when you start to see those -- that chatter in trade journals and the like that usually puts a damper on export activities until those prices settle out. And the opposite behavior happens when the reverse is true. So the lull we are seeing right now is a reflection of watching April prices settle.

Having said that, capacity utilization and general demand have softened year over year in terms of both the Asian markets and the Turkish market. But we are seeing both of that -- or both coasts, we've seen them in the market over the last couple of quarters and couple of months. China was back in the market in the second quarter after being away from the market in Q1 and Q4 and Turkey is regularly in and out of the market, so this behavior is not as unusual.

You mentioned China. With iron ore prices rolling over here and forecasted to go lower with new supply coming on later this year and into next year, are you seeing them starting to kind of arb the iron ore and scrap pricing there where they are starting to use maybe more iron ore?

Well, what we see with China and iron ore is when there are significant moves we see China arbitrage iron ore and scrap. But they don't move dollar for dollar as scrap isn't, as you know, fully substitutable for iron ore and integrated and the scrap is necessary for [EAFs]. So it is really the significant moves in iron ore when we see China arbitraging that.

And then just one last one for me. What are you seeing in terms of scrap flows into your yard? I guess with the winter weather kind of lasting through the end of March are you seeing a normal seasonal uptick or is that maybe muted compared to what you've seen in prior years?

Well, we haven't seen spring yet because, as you point out, there was snow in the Northeast last week and elsewhere in the country. Normally with spring scrap supply flows improve. But scrap flows both on the ferrous and non-ferrous side are very, very low and quite constrained.

Okay, thank you very much.

Thanks.

Phil Gibbs, KeyBanc Capital.

I just had a question on March export volumes and if you could give us any color just regarding that month versus maybe average February quarter levels?

I'm sorry; I missed the first part of your comment on my mic. What was your question?

How did March export shipments compare to average February levels -- February quarter -- February quarter levels?

Yes, as I mentioned in my remarks, March price -- export shipments price levels held steady from February.

Not pricing but the volume side.

Volumes. Volumes were in line with what we saw last year at this time.

Relative to the last -- the quarter you just announced -- the second quarter.

We're only one month into the quarter, so we really can't benchmark it against the last quarter, we benchmark it against year-ago flows.

Okay. Thank you.

Okay.

I am not showing any other questions in the queue at this time.

All right, well, thank you, everyone, for joining us today. And we look forward to speaking with you again when we report our third-quarter results in June.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.