Schnitzer Steel Industries Inc (SCHN) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Schnitzer Steel's Fourth Quarter and Fiscal 2017 Earnings Call. (Operator Instructions) A reminder, this conference is being recorded.

Now I would like to turn the call to Ms. Alexandra Deignan.

Thank you, Carmen. Good morning, everyone. I'm Alexandra Deignan, the company's Vice President of Investor Relations. Welcome to Schnitzer's Fourth Quarter and Fiscal 2017 Earnings Presentation.

In addition to today's audio comments, we've issued our press release and posted a set of slides, both of which 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 Form 10-K, which will be filed later today.

As we note in Slide 2, we may make forward-looking statements on our call today, such as our statements about our outlook and targets for growth. Our actual results may differ materially from those projected in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in Slide 2 as well as our press release of today and our Form 10-K.

Please note that we will be discussing some non-GAAP measures during our presentation today. We've included a reconciliation to those metrics to GAAP in the appendix of 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 and Chief of Corporate Operations.

Good morning, everyone, and thank you for joining us on our fourth quarter and fiscal '17 conference call. We appreciate your interest in our company and we look forward to sharing our results with you this morning.

We delivered our strongest fourth quarter and full year performance since fiscal year '11. It has taken a lot of work and a tremendous amount of perseverance and collaboration by our team to achieve these operating and financial results. And I'd also like to thank our customers and suppliers for their continued loyalty and support. Together, we are making a positive impact in our communities by providing jobs, improving our environment and making sustainable products for the world we live in.

Before moving on to the business of the morning, I want to take a moment to express my appreciation to all of you listening today who have participated in the outreach and relief efforts we have undertaken in Texas, Florida, Puerto Rico and California, to help those who've been impacted by the floods, hurricanes and wildfires of the last several months. We are thankful that our employees and their families who live in these areas are safe, and our thoughts and prayers remain with those who are still experiencing the hardship and challenges brought on by these natural disasters.

So now let's turn to Slide 4. Earlier this morning, we announced our fourth quarter and full year financial results. Our fourth quarter earnings per share of $0.65 reflected a continuation of the strong quarterly trend of improving operating and financial performance which we have seen throughout the year. And for the full year, our adjusted EPS performance was more than double that of fiscal '16.

As you can see, the team has delivered on all fronts. Our volumes in both ferrous and nonferrous products were up 10% and 15%, respectively, for the year. Our adjusted operating income almost doubled. Our cash flow was strong and our net debt reached its lowest level since the first quarter of fiscal '11.

AMR's results reflect the benefits from a combination of better market conditions, the achievement of our multi-year productivity improvement initiatives and our focus on increasing our ferrous sales volumes, enhancing nonferrous yields from the shredding process and delivering record car purchase volumes in our Pick-n-Pull operations.

During the quarter, we completed the integration of our Steel Manufacturing Business and our Oregon metals recycling operations into a single operating division. We call our new division Cascade Steel and Scrap, which we refer to as CSS. CSS also delivered a strong fourth quarter performance, driven by 20% year-over-year increase in finished steel sales volumes and benefits from higher sales prices and productivity improvements, including initial synergies from the integration of these operations.

So now let's turn to Slide 5 for a deeper dive into our results. Our full year adjusted EPS of $1.53 represents not only a significant year-over-year improvement but also marks our best earnings performance in 6 years. These results also reflect the delivery of the higher volumes and margins in the first year of our 3-year organic growth plan.

Our company-wide ferrous volumes increased by 10% year-over-year, driven by a number of key factors. First, our success in diversifying our sales to both export and domestic customers. We shipped to 24 countries this year, with approximately 40% of our volumes going into the domestic market, demonstrating the flexibility of our operating platform.

Second, our ability to expand our supply channels through the use of technology and the benefits of AMR commercial initiatives, which led to the record car purchase volumes, up by almost 1/3 this year.

And lastly, our progress in further optimizing our intra-company transportation and logistics processes through the more efficient use of ships, barges, rail and trucks. These increased volumes enabled us to deliver significant operating leverage. Our increased margins demonstrate the success to date of our strategy to improve productivity and efficiency and to improve our yields.

Our strong operating income performance in fiscal '17 led to adjusted EBITDA, which increased 25% year-over-year, enabling us to maintain operating cash flow of $100 million in a year of higher working capital, resulting from higher volumes and higher prices. Our ability to manage working capital reflects our focus on cash metal spreads, cost efficiency, turning inventory and collecting receivables.

In fiscal '17, we continued to maintain and further strengthen our balance sheet reducing our net debt by 17% while continuing to invest in our business and to return capital to our shareholders.

So now let's turn to Slide 6 to review some of the economic trends underlying our business. On this slide, we can see the key leading indicators for scrap generation and steel demand that we've been highlighting throughout the year and which continue to display strong fundamentals. Through August, the U.S. industrial production index, which includes the energy automotive and construction industries, delivered 6 consecutive months of gain and was 1.5% higher than the same period a year earlier. Consumer confidence has remained strong in 2017, with March and August measures hitting the highest and second highest levels in 16 years. These higher levels of confidence can also be seen through the growth in personal consumption expenditures, which have maintained a positive year-over-year pace. The strong white good appliance shipment trend, the high average age of vehicles on the road and the more aggressive pricing of both used and new light vehicle sales are all contributing to stronger supply flows, including the supply of end-of-life vehicles.

So now let's turn to Slide 7 to review metal market trends. During the fourth quarter, ferrous export market prices rose sharply in late July and early August reaching levels slightly above $350 per ton. The domestic market followed this rise for its August pricing. As of the end of our fiscal fourth quarter, we've seen prices softening, returning to levels we saw in June and most of July, on a combination of seasonal mill outages and destocking.

Scrap has remained competitively priced against semi-finished goods, such as billets, as demand and prices for high-grade iron ore and met coal continue to rise. China's enforcement of tighter environmental regulations to lower emissions from steel manufacturing through production curtailments and forced closures of induction furnaces, together with an almost 30% decrease in steel exports in China, have supported improved global market pricing and demand for ferrous scrap.

Looking to the long-term, we anticipate these pricing trends to continue as China and the rest of the global steel community migrate to more environmentally sensitive production practices, including a greater prevalence of EAFs across the sector and a higher use of scrap in BOFs. These are positive developments, supporting the long-term demand and sustainable value proposition of recycled metals.

China's National Sword program is another emerging example of this move towards a higher environmental focus. The National Sword regulations may require higher levels of product quality, pressuring the lower quality recyclers and creating higher demand for those who can meet more stringent specifications for premium, higher-yielding and cleaner recycled nonferrous metals. All of these trends support an improved and long-term market for our industry with continued opportunities for growth.

Now let's turn to Slide 8 for a review of steel market trends. The long product markets improved sequentially with rebar pricing up driven by higher raw material costs and steady seasonal construction activity. Imported rebar pricing increased at a higher rate than domestic, resulting in a significant reduction in the spread to domestic rebar prices. Rebar imports during the quarter were flat sequentially but remained at substantially lower levels than we've seen over the past couple of years. Compared to the fourth quarter of fiscal '16, rebar imports were down 44%, primarily due to the impact of trade actions and the softer U.S. dollar. We believe the near-term prospects for the long products markets remain positive, primarily due to current and anticipated construction spending and the reduced level of imports. These trends, combined with improving global production discipline should result in higher utilization and a healthy domestic steel industry.

Now I'll turn it over to Richard for a review of our segment performance and our capital structure.

Thank you, Tamara. I'll start off with a review of operating trends for the auto and metals recycling business. At the outset, please note we've recast AMR's historical data to reflect integration of the Oregon metals recycling operations into our new Cascade Steel and Scrap reporting segment.

AMR's fourth quarter results continued a trend of strong quarterly performance. Adjusted operating income per ton of $28 was up by $5 per ton on last year's fourth quarter, driven by margin benefits of higher volumes, a more efficient cost base and a favorable impact from average inventory accounting. Sequentially, adjusted operating income per ton was lower than Q3, the main reason being a sharp rise in market prices in August, which caused a late-quarter squeeze on margins. That was because the resulting increases in purchase cost for scrap led to margins compressing on ferrous shipments that have been contracted before the market ran up. Seasonally, lower retail part sales also impacted margins sequentially but this downside was offset by an estimated $3 million benefit from average inventory accounting.

AMR's fiscal '17 adjusted operating income of $90 million was nearly double the prior year's performance. This strong result was achieved through the combination of higher volumes, increased metal spreads, improved nonferrous yields and favorable impacts of average inventory accounting.

For the full year, adjusted operating income per ton of $29 was also substantially higher, up by around 75% on the $16 per ton we earned in fiscal '16.

Looking at fiscal '17 as a whole, AMR's second half margins were stronger than the first half at an adjusted $32 per ton. This trend means we have a positive trajectory towards achievement of our fiscal '19 goals for operating income per ton on company-wide ferrous volumes.

Now I would like to turn to Slide 10 to review AMR's volume and price trends. In the fourth quarter, AMR's ferrous sales volumes grew year-over-year by 7% and reached 864,000 tons, and sequentially, ferrous sales were also up by 5%. Their average selling prices in the quarter were up by 25% year-over-year, and on a sequential basis, up by 2%. The higher market prices in August will be reflected in shipments, which will benefit our first quarter of fiscal '18.

For the full year, AMR's ferrous sales volumes were 9% higher compared to fiscal '16, and ferrous volumes were up 10% on a total company basis. AMR's nonferrous volumes also increased, up 8% over the prior year quarter and higher by 14% fiscal year-over-year. On a total company basis, nonferrous volumes fiscal year-over-year, were up by 15%.

Our volume growth highlights several positive drivers, including our sales diversification strategy, our flexible operating platform, stronger supply flows, which include record car purchase volumes, the use of commercial analytics technologies, and finally, an integrated transportation and logistics process.

As we look to the first quarter of fiscal '18, we expect AMR's ferrous sales volumes to increase year-over-year by approximately 9%, which would be consistent with AMR's average volume growth trend during fiscal '17. Nonferrous sales volumes for the first quarter are expected to increase slightly year-over-year.

Operating income per ton is expected to be approximately double last year's first quarter on a recasted basis. This reflects reversal of the margin squeeze in August and the realization of benefits from strong commercial and operational performance so far in this first quarter to date.

Moving to Slide 11, I'll cover operating trends and our new CSS reporting segment. The CSS fourth quarter adjusted operating income was $7 million, up by $6 million sequentially and by $2 million year-over-year. This significantly improved performance was primarily driven by increased finished steel sales volumes, higher steel selling prices and initial synergies from integrating our steel mill with the Oregon metals recycling operations.

Finished steel sales volumes increased 4% sequentially and 20% year-over-year, resulting from lower West Coast rebar imports and stable regional demand. Selling prices were also higher by 4% sequentially and by 7% year-over-year due to similar drivers and on higher input cost of scrap.

For the full year, CSS processed approximately 500,000 tons of ferrous metal, which, together with the 3.1 million tons of ferrous sold by AMR, resulted in company-wide ferrous volumes of 3.6 million tons, up 10% year-over-year.

Looking ahead, our first quarter outlook for CSS anticipates a year-over-year increase in finished steel sales volumes of approximately 15%. Operating income is expected to be up significantly on last year's first quarter and to be slightly below the adjusted result for the fourth quarter of fiscal '17. This expected performance would represent a strong start to fiscal '18 before normal seasonal slowdowns occur around the turn of the calendar year end.

Moving on, let's proceed to Slide 12 to review our capital structure. Quarterly operating cash flows were $49 million, up sequentially from $45 million in the previous quarter. For the full year, our operating cash flow was $100 million, which came from converting our increased profitability into cash and from tight control of working capital in a higher price and volume environment. As a consequence, our balance sheet continued to strengthen and our net debt at the end of the fiscal year was $138 million, a sequential reduction of 18%. Our net debt leverage was reduced to 20%, which, together with our improved profitability, resulted in a net debt to adjusted EBITDA ratio of just 1.3x.

In the fourth quarter, our capital expenditures were $13 million, and for the fiscal year's level, our CapEx was $45 million. Looking ahead to fiscal '18, we currently expect to invest in the range of $55 million to $70 million in capital expenditures. The expected increase includes environmental capital projects, replacement and upgrades to mobile equipment in support of our increased volumes and further investment in nonferrous processing technologies.

We paid our 94th consecutive quarterly dividend and our priorities for capital allocation remain balanced among investing in our business, managing our debt and returning capital to our shareholders. Due to our improved financial performance and lower benefits from release of valuation allowances, we expect our tax rate to increase in fiscal '18 to a range around 25%. Our actual tax rate will be subject to our level of financial performance and other relevant factors in this complex area. As is our established practice, we will continue to provide quarterly updates on projected tax rates during fiscal '18.

Now I'll turn the remainder of our presentation back over to Tamara for a review of our progress on sustainability and our strategic priorities for fiscal '18.

Thank you, Richard. In my earlier remarks, I focused on our operating efficiencies, volume growth and financial discipline as drivers of our strong fiscal year and fourth quarter results. We also reviewed the macroeconomic trends and repeating current market dynamics and longer-term demand. There are other trends that are driving our positive outlook as well and that are core to our strong operating and financial results, and they center around the concept of sustainability.

As a leader in the recycling industry for almost 110 years, sustainability is in our DNA. It is the reason we embed in our processes a strong focus on environmentally sound practices, employee health and safety, ethics and compliance, and community partnerships.

In August, we released our third annual sustainability report, which continued to show year-over-year improvement in key resource measures. We lowered water usage, energy consumption and carbon emissions. We also diverted more waste from landfills both in terms of reducing our internally generated waste and by recycling higher volumes of scrap. Beyond our core environmental initiatives, we strive to better serve our employees, our customers and our communities by providing an inclusive, diverse and safe working environment. In fiscal '17, 89% of our facilities experienced zero lost time due to injuries, and for the third consecutive year, we were named one of the World's Most Ethical Companies by the Ethisphere Institute.

Our charitable foundation, Recycling for a Better Tomorrow, has been supporting our communities for 8 years now through disaster relief assistance and our food bank donation program. Our teams support communities across the country in a wide variety of activities as diverse as partnering with local police departments to recycle the metal from weapons taken off the streets and participating in the national Fishing for Energy Initiative that recycles commercial fishing gear recovered from ocean debris. These are only a few of the initiatives that we undertake every year and as our customers, suppliers, communities and employees know well, what we do is at the core of sustainability.

So now let's move to the final slide of our fiscal '18 priorities. Over the last several quarters, we've highlighted favorable industry trends and leading economic indicators that are creating conditions for strengthening scrap and steel markets. Looking to fiscal '18, market conditions appear to be on an improving path as metal supply and demand dynamics are coming into balance, global GDP rates are gaining momentum and sustainability and environmental concerns remain high priorities. In fiscal '18, we will continue to focus on growing our market share, increasing our profitability and investing in technologies and systems to enhance our products, increase our service offerings to our customers, and operate our company even more efficiently.

Last April, we announced key organic volume and margin growth objectives, assuming stable markets. As we indicated then, we believe we can grow our ferrous volumes by approximately 25% to 30% over a 3-year period from the base of 3.3 million tons in fiscal '16. In addition, over the same period, we anticipate that benefits from the operating leverage that we created through our $160 million multi-year productivity improvement initiatives should enable these additional tons to be added at higher incremental margins, enabling us to increase operating income per ton by at least 40% over the trailing 12-month average at the end of Q2 fiscal '17 on company-wide ferrous volumes. We are very pleased to report that through the end of fiscal '17, our volumes and margins have substantially improved from last year and progressing very nicely towards the achievement of our 3-year organic growth objectives.

Our consistent cash flow and our strong capital structure provide the foundation for continued organic and transactional growth and the ability to consistently return capital to our shareholders. We are upbeat and focused on driving more growth in our business into fiscal '18 and beyond.

In closing, I'd like to thank our employees, many of whom I know are listening in to our call this morning. Our financial and operational performance, the best in the last 6 years, illustrates your ability to successfully execute our strategy and drive best-in-class results without wavering from our core values of integrity, safety, environmental stewardship, quality and customer service. I'm also grateful to be surrounded by a team whose compassion and belief in supporting their colleagues and communities has been on full display with the many efforts and contributions made in support of our team members who continue to recover from natural disasters. My thanks go to each of you, as you've truly demonstrated why we have continued to be a leader in our communities and recycling industry for well over a century.

Now operator, let's open up the call for questions.

(Operator Instructions) And our first question is from the line of Phil Gibbs with KeyBanc Capital Markets.

You provided an outlook on the volume for AMR, I think you said 9% growth in ferrous year-on-year. Could you provide some color in terms of what you think AMR's volumes could be for full year '18 on a year-on-year basis?

Yes, Phil. It's Richard here. Good morning. As you know, we're aiming to grow our overall company-wide ferrous volumes by 30% over a 3-year period to fiscal '19. We achieved a 10% growth in fiscal '17, so we're on track with that 3-year objective and it's certainly our aim to continue that throughout fiscal '18, consistent with our first quarter outlook on ferrous volumes.

Is that going to be, excuse me, so AMR's probably going to be the driver? The other segment, is it going to be harder for you to grow that, given, I think, a lot of that scrap is to the mill and the mill is now running at higher levels of utilization and pretty full out right now?

We expect growth in both the AMR and CSS segments because whatever the CSS segment does not use in its own steel mill will be exported to our foreign customers.

So within CSS, does that include any of the West Coast shredding operations or just the ones in the very northeast that are close to Cascade? What does that actually include from a shredder perspective?

It includes the shredding operations in Portland, Oregon.

Okay, I appreciate that. And then on the steel side, do you think the regional dynamics have certainly benefited more so than the rest of the market, given the call it the lack of imports we've seen from Japan and, I believe, Taiwan earlier this year? Because I think the spreads that you all are seeing there are probably better than the rest of the market at this point, so maybe pricing from there before Midwest or Southeast price?

Well, we've definitely benefited from the decrease in our rebar imports that we've seen over the last couple of years. It was obviously stable sequentially but down quite significantly year-over-year, and that has benefited the West Coast market.

And then Richard, on the tax rate, is that going to be more of a buildup to a fuller rate for the year? So I know you said 25% for the year but is it something along the lines of we assume a lower rate and that builds up to a, call it, 35% rate or is it 25% throughout the year?

It will be 25% throughout the year based on our estimate because the way we account for taxes, you look at your projected full year rate and then you use that projection for each quarter throughout the year, and it only changes as your projection for your full year changes on a quarter-to-quarter basis. So 25% for each quarter based on our outlook guidance today but we will provide an update each quarter and throughout the year.

Okay. And then lastly, just a follow up on the tax. What was your NOL at the end of the year, if I could ask, or how to think about that?

Well, our fiscal '17 10-K will be filed this afternoon. But in there, within the tax footnote, you will note that our federal net operating loss carry-forwards are $12 million at the end of fiscal '17.

And I'm not showing any further questions in the queue. I would like to turn the call back to management for their final remarks.

We have a question from the line of David Lipschitz with Macquarie.

Just a quick question in terms of the electrode issue, in terms of have you seen any decline in scrap exports because people are rationing their electrode or you haven't seen any impact?

No, we haven't seen any impact.

And our next question is from the line of Piyush Sood with Morgan Stanley.

Just a quick one. Have you started seeing incremental scrap flows in the South, in your operations especially coming off the hurricanes?

We haven't seen any impact yet from the hurricanes. And we don't expect it to be anything but very localized in the areas that were affected.

And really, when do you expect those flows to show up? Is it sometime later this year or would do you say it's like a 1Q calendar year, 1Q '18?

I think it depends upon the area and how impacted it is. So in places like Houston, I'm not sure that they've seen significant flows at this point. In Puerto Rico, where we have operations, we also haven't seen any significant impact right now. And I think in all of those cases, it will be relatively short-lived and won't affect national flows so I'm not sure at the end of the day, you're going to see a significant national impact.

Okay, that's helpful. And last one for me. The higher car purchase volumes that you had this quarter, I just want to understand, is that just availability of cars has increased or are you kind of displacing some other buyer from the market?

Well, I think that there are probably 2 trends that are going on. One is that we have increased our focus on technologies, customer responsiveness and just our physical presence in order to drive volumes, and that is something that we articulated as a part of our 3-year growth program in April. So I think that our buying initiatives have definitely taken hold the interaction within the Pick-n-Pull operation and our recycling unit has given us significant traction. And so I think that, that has driven a big portion of that supply flow. I think the macro trend that we're seeing is that as you see the new car sales volumes -- you see the dealers being much more aggressive in selling new cars. And that trickles down into the used car markets. And when you look then at the average age of vehicles on the road, which is really at its peak, about 12 years, over 100,000 miles. The more aggressive pricing of used car vehicles is encouraging those people who are driving what is close to an end-of-life vehicle to trade up and that is pushing more end-of-life vehicles into the supply chain. So I think you've got 2 things, one of which we drove and one of which is a bit of a tailwind or breeze, if you will, at our back in terms of increasing supply flows.

And this concludes our Q&A session for today. I would like to turn the call back to management for their final remarks.

Thank you, Carmen. Thank you for joining us on our call today, everyone, and for your interest in our company. We look forward to speaking with you again in January when we report our first quarter results.

And ladies and gentlemen, this concludes the program. You may all disconnect. Have a wonderful day.