Q3 2021 Schnitzer Steel Industries Inc Earnings Call
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Ladies and gentlemen, and thank you for standing by and welcome to the Schnitzer Steel third quarter 2021 earnings release call and webcast. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star 1.
And on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like turn the conference over to your Speaker today, Michael Bennett Investor Relations. Please go ahead.
Thank you Josh and good morning.
And Michael Bennett, the company's Vice President of Investor Relations and.
Happy to welcome you to Schnitzer Steel's earnings presentation for the third quarter of fiscal year 2021.
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 and our web site at Schnitzer steel dot com or F G H and dotcom.
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 and the company's form 10-Q, which will be filed later today.
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 future margin expansion.
Our actual results may differ materially from those projected and our forward looking statements.
Additional information concerning factors that could cause actual results to materially differ from those and the forward looking statement is contained and 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 and 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 and good morning, everyone I'm pleased to welcome you to our fiscal 'twenty, 1 third quarter earnings call.
The operational and financial results that we will discuss today are schnitzer its best results and over a decade. 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.
And ability and integrity.
And thank our employees for their extraordinary efforts over the past 15 months. Our success is the direct result of how you have embraced these values and your performance reflects the collaboration innovation and resilience that define our culture and our company.
Let's turn now to slide 4 to begin a more detailed quarterly review.
Our performance this quarter continued to benefit from efficiencies gained from our 1 schnitzer organizational model that we implemented at the beginning of this fiscal year.
And from growth achieved through the execution of our strategic plan.
Our sustainability framework of people planet and profit.
Is the foundation upon which these results were achieved and I I'd like to highlight some examples of the significant progress we've made in each area.
On the people front, we continued to improve our safety performance as many of you know and each of the last 2 fiscal years, we've reduced workplace injuries to record lows for our company.
Through the third quarter of this fiscal year, we're on track to extend this trend we still have work to do but our team's commitment to safety is clearly showing through.
We're also well on track to achieve our planet goals of reducing absolute greenhouse gas emissions from our recycling operations by at least 25 per cent.
Achieving 100% net carbon free electricity is.
And increasing landfill diversion and through our investments and technologies that enable us to extract more recyclables from the material that we process.
And the financial and operating results that we announced earlier. This morning reflects that we are delivering on our profit goals of growing volumes and expanding margins and so now let's turn to slide 5 for a review of our third quarter results.
Earlier this morning, we announced our fiscal 'twenty, 1 third quarter adjusted earnings per share of $2.20.
Which represents our highest quarterly performance since 2008.
Adjusted EBITDA of $97 million was up almost 40% sequentially.
And it's more than 5 times higher than the third 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 1 ships are operating model.
Notably our adjusted EBITDA per ton of $80 was significantly better than and physical 2012, which was the last time that ferrous and nonferrous prices were at levels as high as we saw this quarter.
This illustrates the benefits we've been able to achieve from our productivity and commercial initiatives.
Our results also reflect a strong sequential lift and sales volumes with ferrous up 24% non ferrous up 15%.
And finished steel up 12% despite constraints and the freight markets.
The pace of our sales volume is now solidly back to pre pandemic levels.
During the quarter, we also returned capital to our shareholders through our 109th consecutive quarterly dividend.
So, let's turn now to slide 6 for a review of pricing trends for recycled metals and finished steel products.
As you'll see on this slide prices for ferrous scrap during Q3 rose to multi year highs continuing a trend that we saw in Q2.
Notably during the quarter, both pricing peaks and troughs or at respectively higher levels and we've seen in the past decade.
And even though prices have dipped slightly since the end of the quarter. They remain at multi year highs. These stronger pricing levels are supported by cyclical and structural trends, including the post pandemic economic recovery and the global focus on decarbonization.
Export sales off the east coast continued to be driven by Turkey.
Turkey is annual crude steel production has increased 21 per cent through may and to meet higher domestic and export demand and total scrap imports into Turkey reached a record high in April.
Export sales off the West Coast are also strong.
The expected decrease and Chinese steel exports following the removal of their steel export rebate tax paired with higher Chinese steel demand is expected to increase overall ferrous scrap demand and Asia.
On the domestic from ferrous scrap demand and prices remained high through the quarter and.
Steel capacity utilization approached pre pandemic levels of 83%.
During the quarter non ferrous scrap prices also reached multiyear highs benefiting from the combination of cyclical and structural market trends, including tight supplies share.
And constraints and de Carbonization programs, Zorba, which was trading as low as 34 cents per pound last year has more than doubled and price.
Demand from material continues to be broad based and we expect it to strengthen as auto production accelerates finish.
Finished steel prices and demand also reached multiyear highs during the third quarter.
In late May there was a fire at our steel mill with no injuries to personnel property loss and damage was limited to the mills melt shop there.
There was no significant impact to our third quarter results and we expect the melt shop to resume operations and late August or early September.
As Richard will explain in more detail, we anticipate that our net insurance recoveries will cover most of the repair costs and also a significant amount of lost income resulting from the fire.
Our Oregon Steel mill is 1 of the very few whose primary energy source comes from hydro electricity.
Combined with the use of recycled metal as its primary raw material steel made and our electric arc furnace has an exceptionally low carbon impact as compared to the industry average.
As we return to full operations at our steel mill, we expect demand for our finished steel products to remain strong.
Let's turn now to slide 7.
Increasing the use of ferrous and nonferrous scrap and industrial production is a great example of how old economy tools will lead the way to Decarbonize nation of the new economy.
A low carbon economy, and many low carbon technologies are widely acknowledged to be more metal intensive.
Recycled metals require less carbon to produce and mind metals, while a variety of solutions will be required to decarbonize. The manufactured metals value chain, increasing the use of recycled metals is 1 path that is achievable immediately.
And the carbonization is a powerful structural driver of demand for recycled metals and scrap is now and important strategic solution for companies and industries and governments that are focused on carbon reduction. It is a differentiator from metals producers and fabricators and it is a critical part of every community commit.
And to supporting a circular economy, and reducing material going to landfills. We can see how some of these trends have translated into higher ferrous scrap metal usage and the U S and globally by looking at the charts on this slide electric arc furnace steelmaking capacity, which uses scrap as its primary raw.
Cereal has been expanding and is projected to increase further.
And in China by 'twenty, and 'twenty, 5 scrap usage and steelmaking is expected to increase by 50% from last year's levels driven by additional eas capacity as well as by the increased use of scrap and their B O S.
Let's turn now to slide 8 to review the strategic actions, we have underway, which are aligned with these long cycle trends.
Innovation efficiency and volume growth underpin our strategic initiatives.
Our innovative investments and advanced metal recovery technologies are critical components of our strategic plan to increase our efficiency and grow our nonferrous volumes.
During the quarter, we began ramping up production on 2 of our new systems with additional systems on track for commissioning by the end of this calendar year.
Extracting more nonferrous metals from our shredding activities is a significant value added process and is directly aligned with global demand trends copper and aluminum demand for example will benefit materially from the low carbon transition through growth and 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 customer base and support our sustainability objectives of increasing recycling and reducing waste.
So now let me turn it over to Richard for more detailed review of these projects and our financial performance.
Thank you Tamara and good morning, I'll begin with an update on our advanced metal recovery Technology initiative.
And early April we commissioned to.
Major new plants and since then we have been testing performance and ramping up production.
1 of these new systems is on the West coast.
Primary non ferrous recovery system.
Juices, Zorba Zurich, and initially to Copa water all recovered from our shredding pools it.
The second new system.
Isn't that what aluminum separation system.
Situated in the Eastern U S.
That is also going through Russell and which now gives us the capability to convert zorba and to a variety of higher volume products.
Including Twitch Copa.
And with Ross and zinc.
During the fourth quarter and we expect these 2 new system.
Production capability.
We also expect to achieve $4 of incremental EBITDA per ton and the fourth quarter, including contributions from these 2 new systems and from the real Buzz Cooper separation system that we had previously implemented.
Construction is well progressed on and additional advanced Corporately cohort separation system on the West coast, which we will use to recover refinery grade copper.
And on the East Coast construction is progressing on another meet your primary and non ferrous recovery system, which will serve that region.
We expect construction of these additional 2 systems will be completed and the fourth quarter of fiscal 'twenty 1 and.
And by the middle of the fourth quarter of fiscal 'twenty 2 respectively.
We also help volume, although 1 system progressing through the engineering and parents and phases.
Subject to new affordability, such as timing of remaining Paramount we are targeting completion of the rollout of our remaining installations by the end of calendar year 'twenty 'twenty 1 and.
Following production ramp up all of our new system should be fully operational by eroding and second quarter or fiscal 2020.2.
We expect and the new technologies will enable us to increase metal recovery.
And to provide increased optionality.
Create a range of higher volume product.
Based on our current volumes and all.
After we complete the rollout.
We expect on non ferrous produced from shredding to increase by 20 per cent or by approximately 50 million post Corona.
We expect the total capital investment for our new advanced meta.
Metal recovery technologies, so be it and the Ranger.
$105 million.
All of this and mode, we have spent approximately $17 million and.
In closing approximately $30 million and fiscal 'twenty, 1 you ought to be.
And the balance of fiscal 'twenty, 1 we expect to spend an additional $15 million and then spend the remaining $20 million and the first half of fiscal 'twenty 2.
No like total.
Slide 10 to discuss our consolidated results bear steel and the market dynamics.
Adjusted EBITDA for ferrous ton reached $80.
And our highest quarterly performance since 2 thirds many.
This represented a sequential increase of $7 and was higher by $60 on a year over year basis.
The strong results benefited from increases in both sales volume and selling prices for recycled ferrous and nonferrous and platinum group metals and for finished steel products.
Revenues from sales of retail parks, where seasonally oh like $7 million sequentially.
And rising scrap market led to a benefit of $7 per ferrous ton.
Average inventory per se.
And by $3 compared from the second quarter.
Ferrous volumes were up by 24% sequentially and.
Up to last year's third quarter ferrous volumes were up like 51 per cent.
We sold our ferrous volumes and 9 countries with Cookie, Bangladesh and Vietnam being the largest sales destinations and the quarter.
Sequentially.
Average net selling prices for ferrous rose by 3%.
And year over year prices were up by 72%.
Strong global demand for recycled ferrous continues to be driven by both cyclical and structural factors, including continuing economic recovery.
And if it's a government stimulus tight supply growth and a year.
And the increased use of scrap and steel making.
Now, let's turn to slide 11 for an update on nonferrous steel and the market dynamics.
Demand for non ferrous increased and the third quarter market prices for Copa reached record levels and prices for aluminum and Zorba, both reached multi year Holly.
Non ferrous sales volumes were up by 15% sequentially and by 27% over last year's third quarter.
Our nonferrous products were sold to 16 countries, including Malaysia, India, China, and South Korea.
Average net selling prices for non ferrous were up by 17% sequentially and like E T per cent year over year.
Let's come to slide 12 to discuss our steel mill performance and West Coast markets.
Finished steel sales volume were up sequentially by 12% and you.
Over the year by 23 per cent.
West Coast demand remains robust and our third quarter sales volume represented our highest quarter since 2014.
Finished steel steel.
Steel prices were up sequentially by 16%.
And year over year by 27 per cent.
These increases reflected the strong demand and the flow through of higher input cost subscribed.
Rolling mill utilization with 90 per cent significantly up both sequentially and year over year.
As Tom mentioned earlier, there was a fire at our steel mill and late Mi.
And with property loss and damage limited to the mills milk Joel.
Given the timing of the incident, there was no significant impact on our financial and operational performance for the third quarter.
We have been assessing the time required for repairs and we currently expect our mill chalk to resume operations by the end of the fourth quarter or by early September.
Inventory of finished steel products made with billets produced before the milk shore fire will be sold to our customers and the fourth quarter.
We have insurance that we believe is truly applicable to the losses and are currently working with other insurers and claims for property loss and damage and business interruption losses.
We anticipate that and.
Recoveries mail policy deductibles and various conditions exclusions and limits will cover most of the cost to repair and replace lost and dominantly stop it and.
And also a significant amount of lost income as a result of the fire.
The accounting recognition of such recoveries is expected to occur over several quarters.
Now, let's move to slide 13 and <unk>.
<unk> cash flow capital structure and our outlook.
Operating cash flow and the third quarter was $53 million benefit from increased profitability more than offset impacts to working capital from the higher price and volume environment.
Free cash flow was $52 million and.
Net debt decreased sequentially by $24 million.
And the aimed at the third quarter, our net debt was $156 million.
Net leverage was 14% and our ratio of net debt to adjusted EBITDA was 0.6 index.
Capital expenditures and the third quarter total $22 million and.
The year to date, our $77 million.
For fiscal 'twenty 'twenty, 1 and that's all of whom we expect to make capital expenditures of up to $110 million.
Just under half of this and will be for growth projects and the remainder for maintaining the business, including for environmental related capital projects.
As we are still assessing towards costs. This projection excludes capital expenditures, we incurred and the fourth quarter and connection with repair and replacement of lost and damaged property and equipment as a result of the milk short fire or steel mill.
Our effective tax rate wasn't expense or 18% from there.
Our adjusted fourth quarter results and included benefits from increased financial performance and.
And certain discrete tax items.
Looking ahead, we expect our tax rate and the fourth quarter to be approximately 22%.
This projected tax rate is subject to our performance trends and the balance of our fiscal year.
While it's still early in the fourth quarter with 2 months to go I'll know turn sure Luke.
And the fourth quarter, we expect finished steel volume to approximate the third quarter.
As you might recall.
Benefited from several shipments, which had been delayed and the previous quarter.
Our fourth quarter outlook would lead to a new finished volumes of over 4.4 million tons, representing our highest volumes since 2013.
Non ferrous sales volumes are expected to increase sequentially and the range of 10% and.
Including benefits from the timing of sales.
Availability of containers and from increased production using our new technologies.
We expect our finished steel sales volumes to be approximately 1 third.
The level of the fourth quarter.
And to arise from selling down of inventory of steel products made from billets created before the fire.
While repairs to the milk Shaw are undertaken and the fourth quarter. The steel mill will have reduced revenues and lost margin and will incur fixed costs and other expenses.
Although we anticipate the insurance recoveries will cover most of the cost to repair and replace lost and Dominic stopped it and.
A significant amount of lost income as a result of the fire there is uncertainty as to the amount and timing.
<unk> mission of such insurance recoveries for accounting purposes, including and the fourth quarter.
We intend to provide a further update on our steel mill.
The end of August or early September.
Excluding the impact of the fire on the steel mill.
And the remainder of our business and.
In aggregate is expected to contribute to consolidated EBITDA per ferrous ton at levels that approximate revenue.
Spending from corporate performance.
Notwithstanding and reduced benefit from average inventory accounting that we expect to drop by half sequentially.
And finally, we expect operating cash flow and the fourth quarter to be strongly positive.
Even excluding consideration of any potential insurance recoveries related to the steel mill fire.
I'll now turn the presentation back over to Tamara.
Thank you Richard.
Our excellent results this quarter were driven by increased volumes and operational efficiencies and positive market conditions, our strategic initiatives to further increase our volumes and to further expand our margins through investments and technology are on track and are expected to deliver additional material benefits.
We have a strong balance sheet with low leverage and interest expense and track record of delivering positive operating cash flows and ability to invest and the growth and productivity of our company and and uninterrupted record of returning capital to our shareholders through our dividend.
With the continued growth and global E F steelmaking capacity, the global focus on de Carbonization and.
And the increased metal intensity of low carbon technologies, the future for our business and industry as bright and <unk>.
Closing I'd like to thank our employees for their outstanding performance. This quarter they've demonstrated once again why we have continued to be a leader and the recycling industry for over a century.
Operator, let's now open up the call for questions.
Thank you as a reminder to ask any question you will need to press star 1 on your and telephone to withdraw your question and principal balance sheets. Please stand by and part of the Q&A roster.
Our first question comes from Emily Chang with.
Goldman Sachs. You May proceed with your question.
Good morning, Emily and.
Morning, Tamara Richard and thanks for taking the time today.
My first question is just around the ferrous market outlook and I think.
And for the past couple of quarters pricing for ferrous scrap export. It has typically been a bit more of a premium income domestic first prices and.
And then what we saw this quarter and is there anything that you're seeing there either and they've been that can't go export market that would have driven that narrowing of the premium products and a lot would you categorize it as and strong domestic market or a week and export market I think and 1 of your charts that you outlined.
Export destinations headset, a shift quarter over quarter.
Yeah.
What what I would what we see right now and and both the export and domestic markets is strong demand and as you know Emily they the domestic markets are typically priced or are the domestic market typically prices at the beginning of every month and the export market trades on it on a daily.
And our weekly basis, what we're seeing with strong demand fundamentally across the globe is that those prices are are really converging and yeah. If you look back years years ago. You saw a lot you you saw a longer and wider premium of exports and domestic but with with Utah.
<unk> and being as it as high as it is around the globe, we're seeing strong demand in both markets.
Got it that's that's helpful.
And then my follow up is just around sort of what youre seeing around China scrap consumption. So far all following the export Oh, sorry, the import ban being lifted early and it's yeah.
So scrap import policy in China are you know continues to be continues to be modified by the Chinese government and and I think there are changes are still and the early days I think the most important takeaway is there they're articulated.
They're articulated goals and demand for more scrap and whether they are where they get the scrap I think is probably less relevant than the fact that their demand for scrap is is increasing we haven't seen a lot of imports from North America into the Chinese market.
They've gotten the imports that they've taken to date from Asia.
But but but their transition to utilizing a higher level of scrap and their b O S and they're there articulation of their goal to increase the amount of steel that they produce.
It's just another strong poll on long term demand for for recycled for recycled ferrous.
Yeah.
And I appreciate it and Paul I'll jump back into the queue. Thank you.
<unk>.
Thank you and as a reminder to ask a question you will need to press star 1 on your telephone. Our next question comes from Phil Gibbs with Keybanc capital markets and you May proceed with your question.
Hey, good morning, good morning.
Question I had was on the.
Was on the non ferrous separation investments and just where you are and the process. I know you give color in terms of where you are and the capital spending, but where are you in terms of.
The rollout and how much of the.
I think what was it about a ton and $10 a ton and EBITDA benefit where where are you at relative to that right now.
Sure Richard why don't you take that.
Yeah, Hi morning morning.
Yeah, we just.
Commission, 2 major systems, 1 and the West coast and.
And 1 of them, the 1 and eastern U U S.
The 1 on the the 1 and the West Coast is on a non ferrous recovery and and Susquehanna the extract zorba and.
And from a selling process and the 1 and the southeastern U S is another major plant that we can use to convert.
[noise] zorba and to other products such as Twitch, so between the 2 of them.
When they are up to.
Production capabilities, which we expect and the fourth quarter, we'll by then and be and are positioned to process more than 50 per cent of zorba.
Through a combination of those 2.2 systems. So we've been we've been ramping up and as I said looking to get to fuel growth and people royalty and the fourth quarter and tangible benefits, we expect in the fourth quarter to achieve incremental and EBIT.
For ton from these 2 new systems and the ones, we implemented previously $4 per ton and that's coming from a combination of recovering more nonferrous from the shredding process.
And increasing the number of products, we produce and benefit from converting zone.
Orbit and to other products such as Twitch.
And beyond that and.
And we have 2 additional systems and construction.
Our coal per separation and plant, which is on the west coast.
And also on East coast.
And primary non ferrous recovery plant and we expect these and on.
And construction to be completed the knees and by the end of the fourth quarter and the middle of the fourth quarter.
Fiscal 'twenty 2 respectively.
And we have we.
We have 5 other systems are and engineering and permanent thing, So, we're making strong progress and.
Beginning to get some of the major systems online and.
But with more to come.
Okay. So it sounds like by by this quarter, you'll be you'll be around you'll be around her and including about half the benefits of at least what you you had targeted initially right.
About halfway through their before dollar share. So that's yes, you just show up half of the $10.
We had targeted.
But you you haven't had and neither benefits before this coming quarter.
And no not significant enough to colo and and and.
And our results because these are the these are 2 of the major systems that we are and the closest from ramping up.
And <unk>.
During the third quarter on the fourth quarter.
Okay.
And then on the the guidance commentary I just wanted to be clear in terms of what you said. So this quarter you did about 80.80, a tonne and an EBITDA prefers tons shipped.
Thank you you said basically your ferrous scrap volumes will be about the same.
As this quarter, and you're saying, even with a lower inventory accounting benefit you'd you'd be in and around that level.
But then you have to tease out the steel impact separate from that is that is that what you communicated yeah. That's that's correct that the core business and core recycling business is doing very well and we expect performance in Q4 to be as good as Q3.
He even notwithstanding that there will be only half the benefit from average inventory accounting that was $7 of benefit in Q3, and we expect only half and Q4.
The the the impact of the of the fire of the repairs are underway as you know it's always please Tim.
Temporary and.
In nature and and good progress is being made and we do believe that as we said insurance is going to cover and.
Most of the cost of repeating the damage and in addition, and.
And most of the lost business income so we've got strong insurance coverage, but its a timing issue in terms of when these insurance settlements our reach so at the moment there and.
Sales and team around and the extent to which any insurance.
Recoveries, our progress there and it could be recognizable for accounting purposes, and the fourth quarter, which is why we intend to provide for Barack day.
And by the end of August or early September.
Okay. That's very helpful. And then lastly, your commentary on your your your nonferrous volumes for the fourth quarter does that does that take into account some of the early benefits you'd be seeing from.
Beneficiary more nonferrous from your investments.
Yes, absolutely that that 10% increase sequentially and.
And our nonferrous sales volume outlook includes and benefits of increased production using the new technologies.
Okay. Thank you very much.
Thanks Bill.
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 and thank you everyone for your time today, we look forward to speaking with you again in October when we report our fourth quarter results and the interim stay safe and stay well.
Yeah.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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