Radius Recycling Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 27, 2023

There are 5 speakers on the call.

Operator

Morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sysco Steel's Third Quarter 2023 Earnings Release Conference Call and Webcast. At this time, all participants are in a listen only mode. After this week's presentation, there will be a question and answer Please note that today's conference may be recorded.

Operator

I will now hand the conference over to your speaker host, Michael Bennett of Investor Relations. Please go ahead.

Speaker 1

Thank you, Olivia, and good morning. I am Michael Bennett, the company's Vice President of Investor Relations. I am happy to welcome you to Schnitzer Steel's earnings presentation for the Q3 of fiscal 2023. In addition to today's audio comments, we have issued our press release and posted a set of slides, both of which you can access on our website at schintzersteel.com. Before we start, let me call your attention to the detailed Safe Harbor statement on Slide 2, which is also included in our press release and in the company's Form 10 Q, which will be filed later today.

Speaker 1

As we note on Slide 2, we may make forward looking statements on our call today, such as our statements about our targets, volume growth and margins. 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 the forward looking statements is contained in Slide 2 as well as our press release of today and our Form 10 Q. Please note that we will be 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.

Speaker 1

Now, let me turn the call over to Tamara Lundgren, our Chairman and Chief Executive Officer. She will host the call today with Stefano Gugini, our Chief Financial Officer.

Speaker 2

Thank you, Michael. Good morning, everyone, and welcome to our fiscal 2023 Q3 earnings call. Before we begin, I'd like to take a moment to thank our team for the progress they've made in deploying our advanced metal recovery technology systems. This quarter, our results include a significant contribution from the Systems Commission to date, both in terms of the increase in non ferrous volume as well as in the production of higher value recycled metals. Today on our call, I'll review our quarterly financial results, the trends affecting our business and progress on the strategic activities we have underway to address evolving industry dynamics and create long term value through the cycle.

Speaker 2

Stefano will then provide more detail on our financial performance, our capital investments and our capital structure. All wrap up and then we'll take your questions. So let's turn now to Slide 4 to get started. Earlier this morning, we announced our results for our fiscal 2023 Q3, which reflected adjusted EPS of $0.67 and adjusted EBITDA of $56,000,000 Our adjusted EBITDA per ferrous ton almost doubled versus the 2nd quarter. We also continued our uninterrupted record of returning capital to our shareholders through the issuance of our 117th consecutive quarterly dividend.

Speaker 2

Sales volumes in the quarter benefited from seasonality, customer inventory restocking and higher production in both recycling and steel manufacturing. Our sequential non ferrous and finished steel sales volumes

Speaker 3

were down

Speaker 2

26% 30%, respectively. Our ferrous sales volumes were down 8% sequentially, primarily due to the timing of shipments that benefited the 2nd quarter. Supply flows improved seasonally but remained tighter than a year ago. So let's turn now to Slide 5 for a review of market conditions. Coming into the Q3, demand for recycled metals was strong driven by improved global steel demand and inventory restocking.

Speaker 2

As the chart in the upper left corner of this slide indicates, however, ferrous export prices softened during the quarter as global steel demand weakened. By the end of the quarter, ferrous prices had decreased about 16% from their March highs. U. S. Domestic prices lagged the fall in export prices, but have converged since the end of the quarter.

Speaker 2

Turkey's lower demand during the quarter was driven by lower steel production, elevated input costs and economic uncertainty leading up to their presidential election in May. An increase in Chinese steel for volumes also impacted Turkey steel demand. Asia's weaker demand during the quarter was similarly impacted by higher Chinese steel exports and a slower than expected economic recovery in China, which dampened market activity. Since the end of the quarter, ferrous export demand off the East Coast has shown a slight upward bias. Ferrous export prices to Turkey reflect continued tight supply in the global deep sea market an increase in demand for July shipments against lower than normal June scrap import volumes and less political uncertainty.

Speaker 2

Turkey's need for 5,000,000 tonnes of steel to support rebuilding efforts in the Iskandaran region implies a need for around 6,000,000 tons of ferrous scrap. We expect that even accounting for Turkish domestic scrap generated by earthquake cleanup activities, Turkey scrap imports should rise materially to meet this need. In the Asian markets, ferrous prices since the end of Q3 have also stabilized, driven by expectations of Chinese increased fiscal stimulus and reduced steel exports, stronger demand in South Asia and slower seasonal scrap generation in the region. Turning to non ferrous, coming into the Q3, we saw stronger demand for non ferrous products globally, including from restocking and the lifting of China's COVID lockdowns. And similar to the ferrous market, prices for non ferrous weakened during the quarter as the slower economic activity in China impacted non ferrous metal consumers in Southeast Asia and India.

Speaker 2

Since the end of the quarter, prices have continued to soften a bit due to seasonally slower industrial activity. Turning to finished steel. While demand and prices came off their near record highs, metal spreads remained robust during Q3. Although higher interest rates and tighter credit conditions could lead to softer demand, there are several offsetting trends, including demand supported by the U. S.

Speaker 2

Infrastructure bill and the Buy America and Buy Clean directives. Our Oregon steel mill with its range of low carbon long products including our net 0 carbon emission Greenfield product line is well positioned to meet this rising demand. Let's turn now to Slide 6 to review the longer term outlook for recycled metals. Decarbonization is powerful structural driver of demand for recycled metals, which require less carbon to produce than mined metals. Many low carbon technologies are widely acknowledged to be more metal intensive.

Speaker 2

As a result, the structural demand for recycled metals remains very positive, supported by the increased focus on decarbonization and the transition to low carbon technologies, the anticipated structural deficits for copper and nickel, and the increased demand from manufacturers and retailers to maximize their use of recycled materials and reduce the environmental impact of their activities. We can see how some of these trends have already been translated into higher ferrous scrap metal usage by looking at the chart on this slide. Electric arc furnace steelmaking capacity, which uses ferrous scrap as its primary raw material, has been expanding and is projected to increase further. Aligned with these structural trends, we continue to focus on providing products and services that meet this demand such as our Green Steel products and our 3PR services. Our 3PR brand reflects a rapidly growing service and supply chain solution for our customers, enabling greater recycling rates, reductions in material going to landfill and improved carbon footprint and enhanced sustainability reporting.

Speaker 2

Turning now to Slide 7. As we often say, sustainability is at the core of what we do and how we operate and has been since our founding in 190 6. This quarter, we were honored to be named as one of Time 100's most influential companies. Our inclusion on this list reflects the contribution of all of our employees who are leading the way in providing solutions to companies, governments and communities focused on carbon reduction and committed to supporting a circular economy. As a 117 year old company with roots in the old economy, this recognition is a great example of how sustainability principles can be successfully and profitably applied to industrial companies.

Speaker 2

I encourage you to visit our website to view our latest sustainability report, which describes in more detail our multiyear people, planet and profit goals that underpin our sustainability framework. So let's turn now to Slide 8 for an update on our strategic priorities. In an economic environment characterized by market volatility and inflationary pressures. We continue to be focused on managing the things within our control. Our Q3 results reflect meaningful progress and benefits from our strategic priorities.

Speaker 2

These priorities are directly aligned with the long term trends of decarbonization and the corresponding need for more recycled metals and can be summarized as follows: 1st, technology investments and advanced metal recovery systems at our major recycling operations. These systems enable us to extract more non ferrous metals from our shredding activities, increase throughput and improve our margins, expand our product offerings and customer base and reduced materials going to landfills. As Stefano will describe in more detail, this quarter's results reflect a significant contribution from the Systems Commission today. 2nd, volume growth. We are highly focused on increasing our ferrous and non ferrous volumes through a combination of organic growth and recent acquisitions.

Speaker 2

Our multiyear focus on this strategic priority has led to an annual 6% volume growth rate between fiscal 2016 fiscal 2022. On a year over year basis, our non ferrous sales volumes are up over 8% driven by higher purchased non ferrous materials and the ramp up of advanced recovery technologies. While our year over year ferrous growth rate in fiscal 2023 is relatively flat, we expect the customer and product initiatives we have underway to drive future volume growth. 3rd, expansion of our products and services to meet the increasing demand for recycled metals. Examples include our Green Steel products and the 3PR services we provide to manufacturers and retailers.

Speaker 2

And 4th, productivity initiatives that we undertake as part of our continuous improvement culture. These initiatives are particularly important in the face of inflationary pressures. In Q3, we achieved the full run rate of benefits from the productivity initiatives that we announced earlier in this fiscal year. So now let me turn it over to Stefano for a more detailed review of our financial and operating performance. Stefano?

Speaker 3

Thank you, Tamara, and good morning. I'll start with a review of our consolidated results and provide an update on our ferrous sales and the market dynamics. Adjusted EBITDA per ferrostone in the 3rd quarter was $48 nearly double sequentially, and adjusted EBITDA was $56,000,000 Our performance benefited from higher average net selling prices for recycled metals coming into the quarter. Despite the increase in scrap flows resulting from normal spring seasonality, the expansion in metal spreads for recycled metals in the higher price environment was limited by the continued tightness in supply flows. Metal margins also benefited from shipments contracted before market prices began to soften in the second half of the quarter.

Speaker 3

The movement in prices in the 3rd quarter led to a modest benefit from average inventory accounting of approximately $2 per ferrous ton, significantly smaller than the $8 from our advanced nonterrous recovery technology program as we continue our ramp up activities. These systems contributed meaningfully to the increase in non ferrous sales volumes of 26% sequentially. The contribution from finished steel products was a significant driver of our consolidated performance, benefiting from seasonally higher construction demand and higher volumes and utilization. We also captured seasonally higher retail parts sales at our Pick N Pull platform. During the Q3, we achieved a full quarterly run rate of benefits from the productivity initiatives we announced and implemented earlier in the fiscal year, targeting an aggregate annual benefit of $60,000,000 focused on a reduction of production costs, operating efficiencies and yield improvements as well as lower SG and A expense.

Speaker 3

While the magnitude of the inflationary pressure on operating cost appears to have diminished compared to recent quarters, mitigating increases in operating cost remains a priority. Turning to the ferrous dynamics in the quarter. Our ferrous sales volumes were down 8% sequentially against a tough 2nd quarter comparison when volumes were up nearly 50% as they benefited from timing of sale of several previously delayed bulk shipments. Average net selling ferrous prices were up 13% sequentially, reflecting shipments contracted at higher prices earlier in the spring. The share of domestic ferrous shipments was 47% in the quarter.

Speaker 3

Our top sales destinations for ferrous exports were Bangladesh, in Turkey and Italy. Now let's move to Slide 10 for an update on non ferrous sales and the market dynamics. Average net selling prices for copper, aluminum and other nonferrous products were up 2% sequentially. Non ferrous sales volumes were up 26% sequentially, driven by increased purchases and higher production and recovery yields associated with our advanced non ferrous technology equipment. We sold our non ferrous products to 13 countries with the major export destinations being Malaysia, India and China.

Speaker 3

Our product mix is highly diversified with sales of products recovered from shredding operations reaching around half of total non ferrous volumes. Now let's move to Slide 11 to provide an update on our technology investments. We continue to advance our technology program focused on increasing metal recovery of non ferrous material and generating more furnace ready higher value products. Once fully operational, we expect our technologies to contribute to an increase of at least 20% of non ferrous volumes recovered from shredding operations. Product optionality gives us the ability to decide whether to process material into higher grades depending on market conditions and demand for the products.

Speaker 3

We also have the option to flex purchases of 3rd party materials such as Zorba for processing and upgrading in our facilities. As shown in the slide, our initiative comprises 13 systems in total. Of these, 6 are advanced separation systems, which are mostly already operational with 1 in commissioning. We also have 7 primary non ferrous systems recovering aluminum and copper, which are the main drivers of the projected increase in recovery volumes. In June, we began commissioning on the West Coast of 1 of its primary recovery systems, bringing to 5 the number of those that are either operational or in various stages of commissioning and completion.

Speaker 3

This leaves 2 major copper recovery systems to construct on the West Coast to complete our investment program, of which one is targeted to start commissioning by the end of the summer. The other one is currently awaiting permitting approval. Subject to this step, we still target construction and commissioning by the end of calendar 2023. We continue to target substantial achievement of the estimated run rate benefits to EBITDA of $10 per ferrous ton by the end of calendar year 2023 upon completion of final permitting, construction, commissioning and ramp up for all systems. The contribution to performance from these technologies in the 3rd quarter increased to more than half of the targeted full run rate as we achieved higher yields on our primary non ferrous recovery systems and also benefited from particularly supportive pricing for the non ferrous products we generated.

Speaker 3

We expect the overall capital investment for these projects to be in the range of $130,000,000 with approximately $5,000,000 left to complete the projects. Now let's move to Slide 12 to discuss our steel mill performance. Finished steel sales volumes of 142,000 tons were up sequentially by 30% as we benefited from strong seasonal construction demand in the West. Our average meal utilization was 97%, which was higher than the U. S.

Speaker 3

Average of approximately 76% for the period. Average net selling prices for finished steel decreased slightly sequentially. Metal spreads at our mill remained robust were down from the record highs experienced during calendar 2022. In the medium and longer term, we believe our mills tend to benefit from demand expected to be created by the U. S.

Speaker 3

Infrastructure build. Now let's move to Slide 13 and discuss cash flow, capital structure and our outlook for the Q4. In the 3rd quarter, Cash flow generated from EBITDA profitability was more than offset by a detriment from working capital associated primarily with the timing of sale and collection for several ferrous bulk shipments at the end of the quarter. Through the 1st three quarters of our fiscal year, our cumulative operating cash flow is slightly positive. CapEx spend in the Q3 was $27,000,000 For fiscal 2023 as a whole, we continue to project our CapEx to be in the range of $110,000,000 to $120,000,000 Slightly less than onethree of the fiscal 2023 CapEx is for growth projects, including our technology initiatives, with the remaining for maintaining the business and environmental related capital projects.

Speaker 3

Excluded from this annual range is CapEx spend associated with the repair and replacement of the shredder enclosure building at our Everett facility during fiscal 2023, which has been approximately $12,000,000 to date, as these expenditures are expected to be substantially recovered through insurance over time. We received proceeds from insurance of approximately $8,000,000 in the 3rd quarter related to this project, lowering the net CapEx spend in the quarter to just below $20,000,000 Net debt was $346,000,000 at the end of the 3rd quarter. Availability under our credit facility remains sizable with a borrowing capacity of $800,000,000 and a maturity of August 2027. Net leverage was 27% at quarterend and the ratio of net debt to adjusted EBITDA was 2.5x. We also returned capital to shareholders through our quarterly dividend.

Speaker 3

Our effective tax rate on adjusted 3rd quarter results was 30.6%, is slightly higher than expected due to the effect of certain tax items in the quarter. Year to date in fiscal 2023, our adjusted tax rate approximated 30%, which rates we would anticipate for the full fiscal year as well, subject to company performance and other tax items. Although there are more than 2 months left in the quarter, I'll now turn to our outlook for the Q4 of fiscal 2023, which is based on market conditions and information we have today. Looking at some of the sequential dynamics In the current lower price environment, we expect an accounting detriment from our average inventory costing method in the range of $5 per ferrous ton in the 4th quarter. Excluding the impact of average inventory accounting of $5 per ferrous ton, we expect our consolidated adjusted EBITDA per ferrous ton to be around $40 We expect our ferrous, nonferrous and finished steel sales volumes to be in the range of their 3rd quarter levels.

Speaker 3

The lower price environment for ferrous and nonferrous recycled metals, together with continued tightness in supply flows, is also expected to lead to a sequential contraction of metal spreads, compounded by the fact that in the Q3, we benefited from selling ahead while prices declined in the latter part of the quarter. We expect the contribution from our steel mill to remain robust, declined sequentially, including due to a planned maintenance outage during the summer. As the chart on the top left shows, we have a multiyear track record of generating positive annual operating cash flow through the cycle. We aim to continue this trend and generate positive operating cash flow in the Q4 and for the full fiscal 2023. And with that, I'll turn the call back over to Tamara.

Speaker 2

Thank you, Stefano. Our results this quarter reflect the positive impacts from our strategic investments and our productivity initiatives. We have a strong balance sheet, a track record of delivering positive operating cash flow through the cycle, and ability to invest in the growth and productivity of our company and an uninterrupted record of returning capital to our shareholders. Despite current market headwinds, the structural demand for recycled metals remain positive and our strategic focus and investments in recovery technologies, volume growth, new products and services and productivity are delivering meaningful benefits. In closing, I'd like to thank our employees for their resilience and their dedication to working safely while continuously serving our customers and communities, supporting our suppliers and demonstrating the critical and essential role of our business and industry in the economy.

Speaker 2

You have demonstrated once again why we have continued to be a leader in the recycling industry for over a century. And now, operator, let's open the call for questions.

Operator

We'll give it a moment for all participants to join the queue. And I'm showing we have a question coming from the line of Phil Gibbs from KeyBanc. Your line is open.

Speaker 4

Hey, good morning.

Speaker 2

Good morning, Phil.

Speaker 4

I just wanted

Speaker 2

To

Speaker 4

clarify the non ferrous investment that you have right now, I think you said $10 a ton of EBITDA when fully complete and that's been consistent this entire duration of the investment period. But wanted to just clarify what you said specifically about the quarter that just ended. I thought I had heard something like $5 a ton of benefit from the program in the quarter.

Speaker 2

Sure. Phil, yes.

Speaker 3

Yes. Good morning, Phil. This is Stefano. Yes, the contribution to performance from these technologies in Q3 was more than half of the targeted run rate, slightly more than that as we achieved Higher yields on our primary non ferrous recovery systems and also benefited from particularly supportive pricing in the quarter for those products we generated. We also purchased more third party materials for processing and upgrading in our facilities.

Speaker 3

So that is correct. And as we think about going ahead with the decline in non ferrous pricing that we saw into Q4, we would expect the benefit in Q4 to probably be slightly less than half of that run rate and then gradually increasing towards that goal that we have and we'll still target a substantial achievement of the full run rate by the end of 2023, that full run rate being the $10 per ton.

Speaker 4

Thank you. And then in terms of the net working capital detriment you called out to the Q3 and some, I think you had called I was just looking at my notes here, You have called some specifically out some perhaps some boats or cargoes that were held in inventory, maybe Some color in terms of the magnitude of that versus what you may have been expecting? And then what should we be assuming for Net working capital unwinds in the 4th quarter.

Speaker 3

Yes, Phil. So in Q3, we had Operating cash outflows, and it was really due to the timing of those ships and The ships went out, the collection though at quarter end didn't happen. So it happened early in Q4. And that's really the primary driver of the detriment from net working capital in Q3. And we were expecting, right, EBITDA profitability to shine, which it did, And that was more than offset by this net working capital detriment.

Speaker 3

Now looking into Q4, we do expect positive operating cash flow. And it should include from our perspective and expectation that the detriment from net working capital that we saw in Q3 that will reverse leading to a stronger release of net working capital in Q4 plus the positive EBITDA profitability. So we have a multiyear track record of generating positive cash flow through the cycle, and we aim to continue this trend in calendar 2023 looking through the quarter.

Speaker 4

Thank you. And then just lastly on the steel side, Very strong volumes in the quarter, expectation for very strong volumes to continue in the Q4. And from your vantage point As a company, are you seeing some of these regional infrastructure projects get led or is this just Effectively some of the just more of the seasonal dynamics and the catch up from a slow start to the year. Thanks.

Speaker 2

Yes. Thanks, Phil. We are not really seeing the infrastructure projects coming in yet, but we're seeing a lot of work getting them ready. And this robust fuel demand It's just the general strength of the West Coast economy and seasonal activity, But we do anticipate, those infrastructure dollars flowing through more strongly, as 'twenty three progresses and into calendar

Operator

Thank you. All right. And I am showing no further questions in the queue at this Time, I will turn the call back over to Tamara Langdon for any closing remarks.

Speaker 2

Thank you very much, and thank all of you for your time today. We look forward to speaking with you again in October when we report our 4th quarter results. In the interim, stay safe and stay well. Thank you.

Powered by Quartr
Earnings Conference Call
Radius Recycling Q3 2023
00:00 / 00:00