Q2 2021 Schnitzer Steel Industries Inc Earnings Call
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Good day, and thank you for standing by and welcome to the shifts or steel second quarter 2021 earnings results call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
So ask the question during the social need the press star one on your telephone if you require any further assistance. Please press star zero.
I'd now like to turn the call over to your Speaker, Michael Bennett Investor Relations you may begin.
Okay.
Thank you and good morning, I am Michael Bennett, the company's senior director of Investor Relations at <unk>.
Happy to welcome you to Schnitzer Steel's earnings presentation for the second quarter of fiscal year 2021.
In addition to today's audio comments, we have issued a press release and posted a set of slides both of which you can access on our website at Schnitzer steel Dot com.
Or S C H and dot com.
Okay.
Before we start let me call your attention to the detailed safe Harbor statement on slide two which is also included in our press release and in the company's form 10-Q, which will be filed later today.
As we note on slide two we may make forward looking statements on our call today, such as our statements about our targets volume growth and future margin expansion.
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 two 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.
Now, let me turn the call over to Tamara Lundgren, our chairman and Chief Executive Officer.
She will host the call today with Richard Peach, Our Chief Financial Officer, and Chief Strategy Officer.
Thank you Michael good morning, everyone.
In preparing for our earnings call. This morning.
Take a look back at our announcement of a year ago.
My remarks last year centered on our designation as an essential business and part of the nation's critical infrastructure.
This enabled us to operate continuously throughout the pandemic.
I discussed the health and safety protocols, we were deploying and the support we were providing to our communities and health workers.
I noted at the time that there was no playbook for how to deal with the COVID-19 pandemic, but there was a long legacy in our company of facing challenges head on.
Navigating through the toughest of times and doing what's right to protect our people sort of.
Our customers support our suppliers and help our communities.
A year later.
I'm happy to report that the operational and financial results that we will discuss today are schnitzer is the best results in over a decade they.
They would not have been possible without all of our employees from our frontline workers to those who have been working remotely living our core values of safety sustainability and integrity of.
Our success is the direct result of how they have embraced these values and their performance reflects the collaboration innovation and resilience that define our culture and our company.
So, let's now turn the slide four to get started.
Ensuring the health and safety of our employees and all who visit our sites is our top priority on the health front. We are continuing to follow all CDC guidelines. These include social distancing wearing face coverings frequently washing our hands and wiping down high touch areas.
We are actively communicating with our employees regarding resources, we can provide in support of their physical and mental well being.
To that end, we are providing paid time off for every employee to receive a full of COVID-19 vaccination.
On the safety front as many of you know in each of the last two fiscal years, we have reduced workplace injuries to record lows for our company.
Through the first half of this fiscal year, we are on track to extend this trend I want to highlight the work of our frontline team members, who have deployed new work processes to protect our employees and all of visitors to our sites, while continuing to work safely and deliver improved safety performance.
We still have work to do but our team's commitment to safety is clearly showing through.
In addition to health and safety our commitment to our other multi year of sustainability goals as shown on this slide continues to increase in importance in today's environment.
These goals are focused on conserving resources, reducing waste and emissions.
Maintaining an ethical engaged and inclusive workforce and giving back to the communities where we operate in.
In recent months, we were recognized by several well respected organizations for various aspects of our sustainability program.
At the fear named US one of the world's most ethical companies for the seventh consecutive year.
And S&P global named US a 2021 sustainability yearbook member and an industry mover.
Being recognized as an industry mover by S&P Global is reserved for one company in the east ranked industry that demonstrates the strongest year over year improvement.
One of acknowledge the contributions of all our team members as these honors reflect their ongoing commitment to our core values and our culture.
Let's turn now to slide five for a review of our second quarter highlights.
Earlier this morning, we announced our fiscal 'twenty, one second quarter adjusted earnings per share of the dollar 51.
Our results reflect adjusted EBITA of $71 million, which was up almost 80% sequentially and it's two and a half times higher than our adjusted EBITA in the second quarter of last year.
Our results reflect strong global demand for recycled metals and finished steel products as well as benefits from the commercial initiatives and productivity improvements related to the transition to our one since our operating model.
Notably our adjusted EBITDA per ton of $73 was significantly better than in fiscal 11.
Which was the last time that ferrous and nonferrous prices were at higher levels than we saw in Q2.
This illustrates the benefits we've been able to achieve from our productivity and commercial initiatives.
Notwithstanding the strong quarterly demand and our overall performance our ferrous sales volumes were down approximately 5% sequentially due to the impact of severe weather in February on the timing of shipments and.
And our nonferrous volumes were down slightly due to tight availability in the container market.
During the quarter, we also returned capital to our shareholders through 100, and the eighth consecutive quarterly dividend.
Let's turn now to slide six for a review of pricing trends from recycled metals and finished steel products.
As you can see on this slide.
<unk> for ferrous export and domestic scrap rose to the multi year highs during the quarter.
Price volatility during the quarter and through the first month of Q3 was significant but trading was maintained at much higher levels than in the recent past, reflecting the stronger demand associated with both of the post pandemic economic recovery and positive structural commodity trends.
Nonferrous scrap prices also reached multiyear highs during the quarter driven by strong global demand, including from China.
Zorba, which was trading as low as 34 cents per pound last year now trades around 75 cents.
And while not shown on these charts P. G. M pricing has also reached multiyear highs.
The sharp increases in ferrous and nonferrous prices during the quarter were driven by low inventory levels. After many quarters of Destocking.
Solid by significantly higher steel mill, and smelter by plans and production levels.
There are also many long term trends that support strong and sustainable ferrous and nonferrous scrap demand, including the new domestic steelmaking capacity that was projected to come online in the coming months.
The global transition to lower carbon technologies, such as electrification in renewables.
The increased use of scrap and basic oxygen furnaces.
China's elimination of quotas for nonferrous scrap imports that meet its metal content standards and lastly, the prospect of China's reemergence of an importer and the global ferrous scrap market.
During the quarter. We also saw strength in demand for our finished steel products.
Our steel mill is one of the very few who's the <unk>.
Primary energy source comes from hydro electricity.
Combined with the use of recycled scrap metal as its primary raw material the.
Steel made in our electric arc furnace steel mill in Oregon has an exceptionally low carbon impact as compared to the industry average.
And of World that is seeking the carbonization recycled scrap metal as well as the low carbon emission steel we produce will be increasingly important metals carbon solutions and.
And we expect demand to continue to accelerate let's.
Let's turn now to slide seven.
Yeah.
The carbonization and broader ESG factors, including government supported green investments together with the catalyst effects of global stimulus are serving a structural drivers of demand for recycled metals scrap in other words is now an important strategic solution for companies.
Industries and governments that are focused on carbon reduction.
It is a differentiator from metal producers and fabricators and it is a critical part of every community's commitment to reducing material going to landfills and their commitment to supporting a circular economy.
The low carbon economy, and many low carbon technologies are widely acknowledged to be more metal intensive whether it is the transition to electric vehicles. The increased use of renewables such as wind and solar for energy the transition to the five G.
Or the efficiency and convenience of smart grids. These low carbon technologies require more metal and recycled metals require less carbon to produce the mind metals wallet of variety of solutions will be required to decarbonize. The manufactured metals value chain increasingly use of recycled met.
<unk> is one path that is of capable immediately.
We can see how some of these trends have already been translated into higher ferrous scrap metal usage by looking at the chart in the upper right hand corner of the slide.
The electric arc furnace, steelmaking, which use of scrap as its primary raw material has been expanding and is projected to increase further in China scrap usage of steelmaking is expected to increase by 50% from current levels driven by additional E F capacity as well as by the increased use.
Use of scrap in their B O S.
Let's turn now to slide eight to review the strategic actions, we have underway, which are aligned with these long cycle trends.
The efficiency innovation and volume growth underpin, our strategic initiatives to leverage the positive long term trends underlying our business.
Our innovative investments in advanced metal recovery technologies are critical components of our strategic plan to increase our efficiency and grow our nonferrous volumes.
Since the end of the quarter, we have commissioned two of the advanced metal recovery technologies systems, which are key to the execution of our strategic plan and the achievement of our sustainability goals.
Extracting more nonferrous metals from our shredding activities is of significant value added process and is directly aligned with global demand trends.
Copper and aluminum demand for example, the benefit materially from the low carbon transition through growth in electrification and renewables.
We expect the benefits from these projects to be substantial and to increase our volumes and revenues lower our operating costs and improve our margins expand our product offerings, and our customer base and support our sustainability objectives of increasing recycling and reducing waste.
We expect the remaining systems to be commissioned in stages and for all of them to be fully operational by the end of the first half of fiscal 'twenty two.
So now let me turn it over to Richard for a more detailed review of these projects and our financial performance.
Thank you Tamara and good morning all.
I'll begin with an upbeat on the advanced metal recovery technology initiatives.
Strong progress on the rollout continues.
The Tamara just mentioned, we commissioned two major new plants since the end of the sake of course.
One is on the West coast of primary nonferrous recovery system that is integrated with the trading operations.
We will use the bill to.
The recovery Zorba continues the.
Aluminum.
Which contains the stimulus.
In Chile to cope of water.
The other system that's been the commission is.
On the advanced aluminum separation system and associates from you that that will cover our east coast operations.
This new system will give us the capability to convert zorba into a variety of higher value products, including Twitch, which contains a higher percentage of aluminum.
Well, the steel brass and zinc.
Construction is in process one of the additional primary nonferrous recovery systems on the East Coast and also one of the fun co per separation system in the west.
It will primarily recover refinery grade copper.
As part of the Technology initiative, we also of five other systems currently in the parenting or engineered increases.
Subject to north of the Covid related or other really is.
Targeting completion of the rollout or installations by the end of the first quarter of fiscal 'twenty two.
The off the production ramp to the.
Really the operational on all of our new systems by the end of the second cold drove out fiscal year.
On an annual basis of shredding process constantly create approximately 250 million tons of non ferrous photos.
We expect our new technology will enable us to increase the recovery of metal answer correctly optionality to create a range of higher value products.
Based on our current volumes.
After we complete the rules, we expect our nonferrous from shredding to increase by 20%.
300 million pounds Corrado.
We now expect the tools the couple of investment for our new advanced metal recovery technology. So the $105 million all of the some of it we have spent approximately $60 million, including $19 million in the first half of fiscal 'twenty one.
And the balance of fiscal 'twenty, one we expect to spend an additional 50 of them.
The resource and then the remaining $15 million in the first quarter fiscal 'twenty two.
Now, let's turn to slide 10 to discuss our consolidated results first sales on the market dynamics.
Adjusted EBITDA per ferrous ton reached $73.
Our highest quarterly performance since two thirds the knee.
This represented a sequential increase of 30.
$5.
It was higher by $44 on a year over year basis.
At the beginning of the courts the.
Market prices for recycled ferrous rose sharply.
The opinion, John you're right, then increasing like the higher price range is towards the end of the quarter.
The sharply rising prices of the market volatility led to a significant expansion of our metal spreads.
A benefit of $10 per ferrous ton from average inventory per se.
Our strong results also benefited from increases in selling prices for recycled nonferrous platinum group metals and from finished steel products.
Ferrous volumes of flat year over year and sequentially were down by 7% juices severe winter weather, which delayed the shipments originally planned for February the.
The impact of the Sealy through the courts are offset approximately half of the benefit from average inventory of fencing.
We sold our ferrous volume to the 10 countries, including Mexico, Bangladesh, Ecuador, and Peru.
Export sales to the Americas represented almost the bulk of the total volume.
Which was a record for the REIT.
And reflect the tight regional scrap supply due to the piece of economic recovery from Covid.
The percentage of domestic steel was sequentially higher.
This was due to the impact of the lead shipments on the export sales volumes.
Sequentially average selling prices for ferrous moves by 43 per cent and you heard of year prices were up by 51%.
The strong global demand for recycled ferrous is being driven by both cyclical and structural factors.
In closing continuing economic recovery benefit so government stimulus type supply growth in the year.
Increased use of scrap and steel making.
No.
The 11 for an update on nonferrous sales and the market dynamics.
Demand from nonferrous increased in the second quarter market prices for aluminum copper and Zorba AUM reached multiyear highs.
The non ferrous sales volumes were up by 10% on last years second quarter and slightly down sequentially due to the timing of shipments that were impacted by the tightness and container availability.
Our nonferrous products were sold to 18 countries, including India, Malaysia, South Korea and China.
All of us selling prices for nonferrous bought up by assets.
The 1% of our year and sequentially by 50%.
Zorba prices have now returned to levels last seen in 2018.
No.
The 12 to discuss the steel mill trends on the West Coast markets.
Finished steel sales volume were up sequentially by 1% on year over year like five per cent.
West Coast demand remains strong and our sales volumes represented our highest second quarter since two thirds of any.
Finished steel sales prices were up by 10% year over year by 11% on a sequential basis.
These increases reflect the strong demand on the flow of high.
The coastal skroch.
Rolling mill utilization with the ETE per se.
Up significantly year over year, but down sequentially due to normal seasonality of temporary impacts of severe winter weather on production in February.
Now, let's move to <unk>.
<unk> and discuss cash flow capital structure and our outlook.
Operating cash flow in the second quarter was positive $5 million.
Benefits from increased profitability more than offset impacts of the working capital from the higher price environment.
From increases in inventory from the delayed timing of shipments.
Net debt increased sequentially to $159 million and at the end of the second quarter.
Net leverage was 18% on the.
Ratio net debt to adjusted EBITDA was still only one ex.
Capital expenditure in the second quarter totaled $23 million and for the year to day $55 million.
2021 of whom we expect to invest capital expenditure of.
Up to $120 million.
Just under half of the summer will be from growth projects.
And the remainder from maintaining the business, including on the environmental related capital projects.
The effective tax rate was an expense 20% on the adjusted second quarter results. This rate was more of an expected primarily due to increased federal tax deduction.
Is that more driven by a higher level of earnings.
Looking ahead, we expect.
The tax rate in the third quarter and also from fiscal 'twenty, one to be approximately 22%.
This projected tax rate is subject to of performance trends and the balance of our fiscal year.
With almost two months of the quarter still to go.
Now turn to our outlook for the third quarter.
In the third quarter, we expect of ferrous sales volumes to increase sequentially in the range of 15% to 20%.
Nonferrous sales volumes are also expected to increase sequentially in the range of obtain the.
15%.
We anticipate the improved volumes will be supported by strong demand.
Placing the shipments that had been delayed by severe weather.
And strengthening supply.
That we expect will return to levels last seen before the pandemic.
We expect our finished steel sales volume to be sequentially in line with our strong second quarter.
Rolling mill utilization to remain high despite a planned maintenance outage.
Adjusted EBITDA per ferrous ton is expected to approximate the second quarter we.
We expect to generate significant operating leverage from sequentially higher volumes and from seasonally higher retail sales.
This operating leverage is expected to replace the power of our expanded metal spreads in the previous quarter, which had resulted directly from the market volatility.
We expect benefits from average inventory of current thing will be similar to the second quarter and the.
Finally on outlook, we expect the operating cash flow to be positive in the fourth quarter on the.
Some of the presentation back over to Tamara.
Thank you Richard.
Our strong second quarter results reflect the resiliency of our operations and the agility of our team.
Leveraging positive market conditions, while delivering on our operational and strategic initiatives, we have a strong balance sheet with low net leverage in the interest expense of strong track record of delivering positive through the cycle operating cash flows and ability to invest in the growth and productivity of our company.
And an uninterrupted record of returning capital to our shareholders through our dividend.
Our performance this quarter can be attributed to the steps we've taken over the past several years and steps, which are currently underway to continually improve our business performance with the projected benefits from our advanced metal recovery projects in the greater emphasis on recycling together with the continued growth in glove.
The E F steelmaking capacity and the increased metal intensity of lower carbon based economies the future for our business and industry is bright.
In closing I'd like to thank our employees for their excellent performance, which demonstrates why we have continued to be a leader in our communities and the recycling industry for over a century.
Thank you for everything that you're doing to remain safe to keep your families and friends safe and to support your colleagues your communities your country and our company.
Now operator, let's open the call for questions.
Thank you.
A reminder to asking the question you'll need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile the Q&A roster.
Our first question comes from Michael the shock with Keybanc capital markets. You May proceed with your question.
Hey, good morning.
Good morning, So first I wanted to touch on the volume outlook, specifically with ferrous export volumes. We saw the sequential decline there what was the primary driver of that decline and how should we think about those volumes going forward at least Directionally and then secondly, if you could talk.
To what you've seen thus far from the Chinese import market given the import restrictions that were lifted this year.
What what activity have you seen there so far.
Sure. So so on the ferrous volumes as Richard mentioned, we had the three ships that were delayed due to severe weather in February that moved over into a into Q3 and that was really the driver of the decline in <unk>.
And the Q2 volumes and in Q3 as you can see I'm not even putting aside the volume the extra volumes that are coming over from Q2.
The type of end of our range assumes an increase in volumes.
Regarding China, we Havent and I assume you're talking about ferrous enter kind of granting kind of we haven't seen a lot of first the imports by China.
From the U S or from from the ear, where they've been taking the men have been from from Asia and and the reason for that I think is really due to two issues one is.
There are still some significant scrap metal content questions that are outstanding and there are complex import procedures, but I would expect that those will be resolved because there is demand. There is demand that's underpinned by carbon reduction goals from among other things. So I think the this is.
It's just a matter of time.
Okay on the holding gains of about $10 a ton in the in the.
Quarter did that cover the steel business as well and if so what was the split there between the <unk> steel.
Yeah, Hi, Michael the short shorts here that's her.
Overall average inventory accounting.
Benefit for them for our results, but the.
Tim.
The $10 $10 a ton of as you can see from our.
Predicting similar.
In the third quarter.
Okay.
On the infrastructure Bill I wanted to get your take on just how you foresee an infrastructure program playing out.
If you could talk to the potential impacts to your business given your exposures there that that would be helpful.
Sure. So it's still early on to know what the timing of that would be but I think that and of U S. Infrastructure. Bill is more a question of when not if and I think that the debt the impact to the scrap business as well as to the to the steel business.
It will be significant and I know people are doing a lot of back of the envelope analogy as to exactly how many tons of oh, it could be could be a part of the demand profile as a result of the infrastructure Bill, but I think that you've got to think about it broadly yes, there will be definitely an increase in steel.
All of usage.
And and and there. We also project that there will be a significant increase in GDP growth and those growth drivers have multiplier effects. They have multiplier effects in terms of jobs in terms of consumer activity. The more consumer activity that you see you, you'll see more generation of scrap and and.
And then you have to take into account the transition to low carbon technologies, specifically the commitment on the part of the major auto producers to transition from Ice's to Evs that in and of itself will result in significant demand for new vehicles, and and probably the encouragement.
The replacement of existing Ice's, So we see the infrastructure bill as being a long cycle.
Underlying demand driver for both recycled metals as well as for steel.
Got it that's helpful.
Lastly from me just as we look at the balance sheet, one times net debt to EBITDA, where do you feel comfortable taking your leverage.
In the same vein do you see any opportunities in the current M&A environment.
So we we don't have a of target that we have.
Debt, we've put out there, but clearly we've got a strong balance sheet with a lot of room to look at and to look at both organic and inorganic investments and we are we have been doing that we will continue to do that and I think that with the increasing focus.
On on carbon reduction and the investments that companies need to make recycling companies as well as steel companies spend in particular of recycling companies to to reduce their environmental footprint.
We are leaders in that and we see opportunities for us as as we expect the industry to consolidate.
Got it thank you.
Yeah.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Tamara Lundgren for any further remarks.
Thank you operator, and thank you everyone for your time today, we look forward to speaking with many of you in the coming days and again in mid summer when we reported our third quarter results and the interim stay safe and stay well.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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