Radius Recycling Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 4, 2024

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Radius Recycling Second Quarter 2024 Earnings Release Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Michael Bennett, Investor Relations. Please go ahead.

Speaker 1

Thank you, Marvin, and good morning. I'm Michael Bennett, the company's Vice President of Investor Relations. I'm happy to welcome you to Radius Recycling's earnings presentation in the Q2 of fiscal 2024. 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 atradiusrecycling.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 have 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 2024 Q2 earnings call. On our call this morning, I'll review our Q2 results and the market conditions impacting our performance. Stefano will then provide more detail on our financial performance and our capital investments and allocation priorities. I'll wrap up with an update on the strategic actions we have underway to address current industry dynamics and create long term value through the cycle, and then we'll take your questions.

Speaker 2

Let's turn now to Slide 4 to review our Q2 highlights. Without question, current conditions in the scrap markets remain challenging. The cyclical headwinds of high interest rates and low manufacturing activity are creating tighter supply flows and compressing our metal spreads. And they are being exacerbated by continued inflationary pressures. Our Q2 results reflected adjusted EBITDA of $3,000,000 and an adjusted EPS loss of $1.04 While our 2nd quarter volumes are always impacted by seasonality, this year they were particularly affected by unusually wet winter weather.

Speaker 2

However, on a year over year basis, our non ferrous volumes increased in Q2 due in part to contributions from our strategic investments in Advanced Metal Recovery Technologies. The tough impacts of cyclicality are not new to us. What is different this time are the structural demand tailwinds, which are strongly aligned with our strategic initiatives focused on metal recovery technologies, volume growth, expansion of our 3PR services and mitigating the impact of current market conditions through actions that are within our control, specifically cost reductions, operating efficiencies and execution. During the Q2, we achieved substantially the full quarterly run rate associated with the $30,000,000 productivity plan that we announced last October. We expanded this plan by an additional $40,000,000 through a 10% reduction of SG and A expense and further production cost efficiencies.

Speaker 2

These initiatives included workforce changes, which have a profound impact not only on our colleagues who are no longer with our company, but also on the Radius team. Our team has shown tremendous resilience in managing through this challenging time, and I want to thank them for their commitment and nimbleness in executing these changes while continuing to work safely and support each other. Let's turn now to Slide 5 to review market trends. Scrap supply flows remained tight during the quarter on lower economic activity. For the last 16 months, U.

Speaker 2

S. Manufacturing PMI has been clocking in at below 50. The longest stretch of contraction in manufacturing activity that we've seen in over 20 years. The most recent March report, however, shows demand might be bouncing back with the index rising to slightly above 50, up 2.5 percentage points from February, which may mark the beginning of a manufacturing recovery. Another indicator of scrap tightness is the average age of vehicles on the road, driven by higher prices for used cars, lower auto production and higher financing costs.

Speaker 2

The continued increase in average age of vehicles on the road has resulted in lower scrappage rates of end of life vehicles. Other contributors to the constrained scrap supply include the relatively low demand for durable goods and increased scrap collection costs, including the impacts of inflation. All of these tight supply conditions have led to a stickiness in scrap purchase costs, which have not moved in line with the changes in selling prices. Now as you can see on this slide, ferrous export selling prices strengthened in the early part of the quarter driven primarily by restocking globally before softening in the second half of the quarter. Scrap prices in the U.

Speaker 2

S. Domestic ferrous market were higher than export prices throughout the quarter and followed a similar trajectory. Since the end of the quarter, March ferrous export and domestic prices atypically weakened further, but preliminary April reports indicate a stabilizing domestic market and a slightly improving export market. Turning to non ferrous, Base metal index prices for aluminum and copper remained range bound during the quarter impacted by a variety of factors including a softer U. S.

Speaker 2

Dollar, supply tightness and weaker demand out of China. Turning to finished steel. Market prices in the quarter remained relatively steady, although the unusually wet weather on the West Coast during the quarter impacted construction activity beyond normal seasonality. We expect to see this correct itself over the next few months along with increased demand related to the U. S.

Speaker 2

Infrastructure bills. Our Oregon steel mill with its range of low carbon products including our line of net zero carbon emission steel products is very well positioned to benefit from these market movements. So now let me turn it over to Stefano.

Speaker 3

Thank you, Tamara, and good morning. Starting with the ferrous market dynamics in the quarter. Average selling prices for ferrous improved sequentially by 8%, driven by the strengthening we saw in the early part of the quarter from restocking. However, the benefit of increased selling prices was mostly offset by higher scrap purchase prices as tighter supply flow conditions continued to constrain our ability to expand spreads more meaningfully. Compared to our early January expectations, 2nd quarter performance was also impacted by the decline in ferrous export prices during January February, which was due in part to elevated levels of Chinese steel exports.

Speaker 3

In the 1st 2 months of calendar year 2024, China's finished steel export increased 33% year over year, impacting both steel production and ferrous scrub demand in Asia, the Middle East and Turkey. Ferrous sales volumes were down 15% sequentially as they reflected the constrained supply flows, including from winter seasonality and also delays in certain bulk shipments at the end of the quarter. Our 2nd quarter results included a modest positive impact from average inventory accounting of $2 per ferrous ton in the higher ferrous price environment, which compared to 1,000,000 dollars detriment in the Q1. We also recognized $2,000,000 in insurance recoveries related to the shredder outage at our Everett facility that occurred in prior years, which compares to $4,000,000 recognized in the Q1. The share of domestic ferrous shipments was 49%, slightly higher than usual due to the export shipment delays.

Speaker 3

Our top sales destinations for ferrous exports were Bangladesh, Turkey and Peru. Now let's move to Slide 7 to discuss non ferrous sales and the market dynamics and provide an update on our non ferrous investments. Non ferrous sales volumes were up 7% year over year, reflecting benefits of our non ferrous recovery investments and expansion of our platform and we're down 3% sequentially on seasonality. We sold our non ferrous products to 13 countries with the major export destinations being India, Malaysia, Thailand and China. Average net selling prices for copper, aluminum and other nonferrous products were up 3% sequentially on steady global demand and softer U.

Speaker 3

S. Dollar. However, the prices of PGM metals continued to be impacted by subdued demand from U. S. And global auto producers and were down 7% sequentially and around 50% from a year ago.

Speaker 3

We continue to progress our investment in primary nonferrous recovery systems, which drive the incremental metal recovery and the majority of the expected contribution from our program. Several of these primary systems are in various stages of commissioning and ramp up with 2 left to start construction on the West Coast, of which 1 awaits permitting approval. We work closely with our technology vendors to complete fabrication and installation and continue to project completion of construction of the currently permitted primary systems by the end of the summer will ramp up to full operations to be reached by calendar year end 2024. We also have already operational advanced separation systems that give us the option to process the mixed aluminum metal zorba into higher grade twitch and other furnace ready materials when market dynamics are supportive. Overall, the contribution to performance from these systems was positive in the 2nd quarter.

Speaker 3

Once fully operational, we continue to expect substantial returns from our investments in these technologies of approximately $10 EBITDA per ferrous ton. Now let's move to Slide 8 to discuss our steel mill performance. Our finished steel products remained finished steel products remained a significant contributor to our consolidated performance in the Q2, although down sequentially on construction seasonality. Finished steel sales volumes of 114,000 tonnes were up 5% year over year, and rolling mill utilization of 81% remained well above prior year levels of 75%, both a reflection of continued healthy demand from nonresidential construction in our Western U. S.

Speaker 3

Markets. Sequentially, sales volumes were down 11% due to seasonally lower construction demand, including from unusually prolonged periods of rain on the West Coast, particularly in California. Average net selling prices for finished steel were flat sequentially. We believe our mills tends to benefit from the expected demand created by the U. S.

Speaker 3

Infrastructure builds. Now let's move to Slide 9. Operating cash outflow for the 2nd quarter was $55,000,000 reflecting a detriment from net working capital, primarily due to the timing of shipment and collections, including the impact of bulk shipments delayed at the end of the quarter. We expect this working capital item to reverse and benefit operating cash flow generation in the 3rd quarter. Capital expenditures were $15,000,000 during the Q2.

Speaker 3

We have lowered the projected capital expenditures for fiscal 2024 as a whole, which we now expect to be around $80,000,000 compared to $100,000,000 previously. Approximately onefour will be for growth projects, including the completion of our non ferrous technology initiatives and investments to support recycling services expansion with the remaining spend for maintaining the business and environmental related capital projects. Net debt was $360,000,000 at the end of the second quarter, including the impact from the net working capital detriment due to the timing of shipments at quarter end. Availability under our credit facility remains sizable with a borrowing capacity of $800,000,000 and a maturity of August 2027. Net leverage was 30% at quarterend.

Speaker 3

We also returned capital to shareholders through our quarterly dividend. The effective tax rate for the 2nd quarter was unusual, reflecting an expense of approximately 4% on reported pretax results and 8% on adjusted non GAAP results. The lower tax rate was driven primarily by the impact of changes in projected company performance, compounded by the recognition of a valuation allowance charge of $2,000,000 on deferred tax assets in one of the company's tax jurisdictions. Now let's move to Slide 10 to review our productivity improvement program. We continue to focus on ways to mitigate the current market conditions, inflationary headwinds and operating margin pressure through things that are in our control.

Speaker 3

Looking at some of the specifics regarding the new $40,000,000 program. A primary component is from adjustments in headcount and other employee related expenses, especially focused on SG and A type activities. We are also decreasing a sizable amount of non trade procurement spend, increasing productivity in transportation and logistics and further reducing certain discretionary activities such as travel, use of professional services and other outside services. Approximately half of the targeted quarterly run rate benefits from these new initiatives is expected to be achieved in the Q3, with substantially all of the remainder by the end of the fiscal year. We expect to incur restructuring charges and other exit related costs of approximately $6,000,000 in connection with these measures, of which $3,000,000 were incurred during the Q2.

Speaker 3

Given we are still early in the quarter, we plan to provide a Q3 quantitative outlook at a later time when trends of volumes and spreads and the impact of seasonality on both scrap flows and construction activity become more visible. And with that, I'll turn the call back over to Tamara.

Speaker 2

Thank you, Stefano. Decarbonization is driving increased demand for recycled metals. Many low carbon technologies are more metal intensive than the technologies they're replacing and recycled metals require less carbon to produce than mined metals. The anticipated structural deficits for metals such as copper and nickel and the increased use of recycled metals by manufacturers seeking to reduce their environmental impact are also driving demand for our products and services. And additionally, the use of ferrous scrap in the steelmaking process is also expected to continue to grow significantly in the coming years.

Speaker 2

And EAF steelmaking capacity, which uses ferrous scrap as its primary raw material, has been expanding and is projected to increase further. While we do not control the pace of improvement in market conditions, we have seen in the past how quickly the cycle can turn. We expect scrap supply flows to benefit from a decline in U. S. Interest rates and a recovery in global activity including auto production and to provide us with significant operating leverage benefits.

Speaker 2

Over the last 36 months, a period characterized by both historical margin highs and lows, our adjusted EBITDA averaged approximately $45 per ferrous ton. We believe that the completion of our investments in advanced non ferrous recovery technologies should be additive to our recent historical average and together with our cost reduction and productivity plans should result in meaningful contributions to our margins independent of the timing of a market recovery. Today's market conditions won't last forever. With our over 100 operating facilities, our low carbon and net 0 carbon emission green finished steel products, our 3PR service and supply chain platform and the cost reduction and productivity programs and strategic investments we have underway, we are well positioned to benefit as U. S.

Speaker 2

Interest rates decline, global manufacturing activity recovers, infrastructure investment takes off and the transition to low carbon technologies continues. Before we open the call for questions, I'd like to thank our employees again for their dedication to continuously servicing our customers and communities, supporting our suppliers and demonstrating the critical and essential role of our business

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Martin Englert of Seaport Research Partners. Your line is now open.

Speaker 1

Hello, good morning, everyone.

Speaker 2

Good morning.

Speaker 3

Good morning.

Speaker 4

First question, the company has introduced a total of 70,000,000 dollars of reductions and most recently the $40,000,000 lag. If the recent market fundamental trends persist, do you feel there's room for additional reductions on top of this over the next 12 months or so?

Speaker 2

So let me start, Martin and Stefano, please add in, as you see fit. The program that we've just implemented of $40,000,000 has benefits that have yet to be seen in our results. About half of them are expected in Q3 with substantially all by the end of the calendar year. And these measures, as Stefano indicated, are a combination of cost reduction and productivity efficiencies, operating efficiencies. We have a successful history of adjusting our platform appropriately as market conditions require and that's a reflection of the nimbleness and the resiliency of both our team and our platform.

Speaker 4

Okay. Thank you for that. Since exiting the February quarter, can you discuss any changes that you've seen in ferrous recycling spreads and inbound scrap flows that you may have observed?

Speaker 2

Sure. So as I mentioned in our prepared remarks, since the end of the quarter, we saw prices in both the export and the domestic markets in March atypically weakened. Typically in the with the beginning of spring, we start to see a rebound in inflows and the like. We didn't see that in March. Part of that is due to weather.

Speaker 2

And as I also mentioned, the manufacturing activity has been in a 16 month contraction with just March beginning to show some improvement. But the preliminary April reports, I mean, we're only 4 days into April, are indicating a stabilizing domestic market and a slightly improving export market?

Speaker 4

I saw that the export price has bumped up a little bit in recent weeks. What have you seen as far as volume activity or demand activity on the export front since exiting the quarter?

Speaker 2

Well, I think what we're seeing is what I would say in the context of current activity, sort of more steady buying off the East Coast or steady selling off the East Coast into Turkey in that region. A little still a little weak on the West Coast and both markets are being impacted by this recent elevated level of Chinese exports. And so I do see that as impacting some of the export demand.

Speaker 4

Okay. On the recent quarter here, inventory holding gains were $2 per ton. Anything that you anticipate for 3Q or if you're uncertain about it, maybe another way to approach it would be if things just held steady where they're at today quarter on quarter, any anticipated change in holding gains or losses?

Speaker 3

Yes, Pareen. This is Stefano. Obviously, we are not providing quantitative guidance for a Q3. But mechanically, inventory and holding gains or losses or what we call the average inventory accounting effect. This effect is positive in a rising market environment as we saw in Q2 and detrimental when prices decline.

Speaker 3

So the Q3, as Tamara mentioned, started in March with domestic and export prices declining before stabilizing and slightly improving. So based on those trends, you would expect the Q3 to show a detriment sequentially, all other things being equal from Iran. Obviously, this is subject to, as you said, to price changes for the remainder of the quarter.

Speaker 4

Okay. So even if we had stability in the last 2 months of the quarter, just because of what kind of happened with the abnormal move seasonally in March, you still think it would translate into a holding loss potentially?

Speaker 3

That's correct. Mechanically coming from prices that were higher in February if they're lower for the new quarter. Mechanically, that's how we would work, yes, Martin. Probably based on what it is right now, it wouldn't be a material amount, but it would mechanically be directionally a detriment to the quarter, correct.

Speaker 4

And there were 2 recent events I wanted to touch on, the Baltimore Bridge collapse, the earth quake in Taiwan. And if you could please touch on if there are any implications for the company. I understand you don't have a footprint in Baltimore, but it's East Coast Ferris exports. It's going to impact logistics and there is scrap that's exported out of there. So I'm kind of curious what your thoughts are on those two items?

Speaker 2

Both of those events are tragic and obviously our thoughts are with all of those who are impacted. For the impact on the company neither we don't expect an impact either in connection with the Baltimore situation or in connection with Taiwan. I think any rebuilding or the rebuilding that is necessary in Taiwan is likely going to be met by their own domestic capacity.

Speaker 4

Okay. And anything as far as thinking about scrap demand or going into Taiwan or that area, no implications there really?

Speaker 2

Not for us. I really don't see that. They are primarily a container purchaser. And so, as I said, I think the rebuilding required they can meet internally with their own capacity.

Speaker 4

Okay. That's all I have. I appreciate it. I thought you did a really good job navigating a difficult market, especially on the West Coast there looking at the broader trends, it was a lot more challenging than what the company had put up for results.

Speaker 2

Well, thank you very much for that Martin. And as we talk about in the company regularly is our job is to keep what they say one eye on the microscope in terms of managing our costs and efficiencies. But we take a lot of comfort with the one eye on the telescope, which really sees a very, very positive structural tailwinds driven by EAF production growth and decarb trends and the metal intensity of low carbon technologies. And we just feel that we're very well positioned to take advantage of that. The cyclical headwinds of low manufacturing activity and these higher for longer interest rates will turn And with all the work that the team is doing and the flexibility of our platform, I really believe we're going to be well positioned to benefit from all of that.

Speaker 2

And the infrastructure investment, the funds that are going to come through ultimately from that legislation. So thank you.

Speaker 4

Thank you.

Operator

Thank you. This concludes the question and answer session. I would now like to turn it back to Tamara Lundgren for closing remarks.

Speaker 2

Thank you and thank you everyone for your time today. We look forward to speaking with you again when we report our Q3 results. In the interim, stay safe and stay well.

Operator

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

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Earnings Conference Call
Radius Recycling Q2 2024
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