Q1 2022 Schnitzer Steel Industries Inc Earnings Call

Ladies and gentlemen, please standby your conference call will begin momentarily once again, please standby your snitzer steel first quarter 2022 earnings release call and webcast will begin momentarily. Thank you for your patience and please continue to hold.

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Thank you for standing by and welcome to the Snitzer Steel first quarter 2022 earnings release call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone as a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Michael Bennett Investor Relations. Please go ahead Sir.

Thank you Jonathan and good morning, I'm, Michael Bennett, the company's Vice President of Investor Relations I'm happy to welcome you to Schnitzer Steel's earnings presentation for the first quarter of fiscal year 2022.

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 Schnitzer steels Dot com.

Yeah.

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 statement is contained in slide two as well as our press release of today and our Form 10-Q.

Note that we will be discussing some non-GAAP measures during our presentation today we.

We've 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.

Yeah.

Thank you Michael Good morning, everyone and welcome to our fiscal 'twenty, two first quarter earnings call.

I Hope you all had a good holiday break and like me are looking forward to a healthier safer and even stronger 2022.

The results that we will discuss today, our best first quarter earnings on record they would not have been possible without all of our employees from our frontline workers to those who've been working remotely.

Our core values of safety.

Paying ability and integrity.

Many of our employees are listening to this call today I'd like to congratulate you on your first quarter achievements and to thank you for your extraordinary efforts in serving our customers and supporting our suppliers in the face of significant COVID-19 related labor and logistics constraints.

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 I'm very proud of what you've accomplished during these most challenging times.

On our call today, I'll review, our quarterly financial results and the market and macroeconomic trends affecting our business I'll also provide an update on our strategic initiatives and investments we have underway to address evolving industry dynamics and create long term value through the cycle.

Richard will then provide more detail on our financial performance Capex investments and capital structure I'll wrap up and then we'll take your questions.

So, let's turn now to slide four to get started.

As one of North America's largest metal recyclers sustainability is at the core of what we do and how we operate and has been since our founding in 19 out of six in.

In mid December we issued our eighth annual sustainability report, which highlights the company's commitment to creating a more sustainable future by supplying our customers with high quality low carbon recycled metal and finished steel products.

This year's sustainability report describes the significant progress we've made against our people planet and profit goals.

In fiscal 'twenty, one among other accomplishments, we achieved our safest record our safest year on record we reached our goal of 100% net carbon free electricity use at our facilities ahead of our fiscal 'twenty two targets.

And we reduced our scope, one and two emissions by 19%.

Our 2019 baseline.

We were honored this year to be recognized by a number of organizations for our leading performance and sustainability I.

I encourage you to visit our website to view our latest sustainability report, which describes how we help conserve resources, how we innovate to use less water and energy and to generate less waste, how we create a safe ethical engaging and inclusive workplace and how we give back to the communities where we operate.

Eight.

So now, let's turn to slide five.

Earlier this morning, we announced our fiscal 'twenty two first quarter adjusted earnings per share of $1 58.

Almost triple the results from a year ago, and our best first quarter performance on record.

Our first quarter results benefited from the strong global demand for recycled metals, a robust west coast market for finished steel products and average selling prices for ferrous nonferrous and finished steel products at or near multi year highs.

Our Q1, adjusted EBITDA per ferrous ton was $68 far exceeding the $38 per ton of a year ago.

Our year over year, ferrous and nonferrous sales volumes increased by 9% and 11%, respectively and benefited from our acquisition of the Columbus recycling assets on October 1st.

Our steel mill continue to ramp up production during the quarter as operations resumed following the melt shop outage in late May.

Rolling Mill utilization was on an increasing trend throughout the quarter with November utilization, reaching 91%.

Our balance sheet remains strong which enabled us to continue our uninterrupted record of returning capital to shareholders through the issuance of our 111th consecutive quarterly dividend.

Our record results this quarter would have been even stronger had several contracted shipments for November not slipped into December due to COVID-19 related supply chain disruptions.

While we expect to see a strong year over year increase in contracted ferrous and nonferrous sales in Q2 at.

Volume levels consistent with Q1.

The supply chain impact on shipments is currently difficult to predict.

As a result, we will provide our forward looking guidance later in the quarter around the end of February.

Let's turn now to slide six for a review of pricing trends for recycled metals and finished steel products.

As you can see on this slide market prices for ferrous scrap during Q1 remained near multiyear highs.

Favorable pricing levels are supported by cyclical and structural trends, including the increased use of recycled metals and the global focus on decarbonization.

Export sales off the east coast were broad based during the quarter ferrous prices peaked at multi year highs in mid October then softened in mid November largely due to a slowdown in demand from Turkey.

However prices were still remained at historically strong levels.

Prices for export sales off the west coast during the quarter trended Similarly to the east coast with the mid November softening, driven by lower steel prices and lower billet and scrap import demand from China.

On the domestic front ferrous scrap demand and prices remained high and steel capacity utilization reached 85% during the quarter exceeding pre pandemic levels copper.

Copper and aluminum scrap prices traded at or near multiyear highs benefiting from tight supplies shipping constraints and deployment of low carbon technologies.

Prices for PGM metals, however fell during the quarter, primarily due to reduced auto production.

Man for finished steel continues to increase with prices, reaching their highest levels on record.

Supply flows remained robust in Q1, despite trucking and COVID-19 related labor shortages in certain markets.

Since the end of the quarter, we have seen normal seasonality and supply flows with reported trading levels for ferrous nonferrous and finished steel products higher than a year ago.

Let's turn now to slide seven to discuss some of the longer term demand trends for recycled products and services.

As we have discussed on previous earnings calls Decarbonization is a powerful structural driver of demand for recycled metals recycled metals require less carbon to produce been mined metals and many low carbon technologies are widely acknowledged to be more metal intensive.

The use of recycled metals is recognized as an as an important strategic solution for companies industries and governments that are focused on carbon reduction, it's a differentiator for metal producers and fabricators and it is a critical part of every community's commitment to supporting a circular economy.

And decreasing material going to landfills.

We can see how some of these trends have translated into higher ferrous scrap metal usage in the U S and globally by looking at the charts on this slide.

E F steelmaking capacity with use of scrap as its primary raw material has been expanding in the U S and globally and is projected to increase even further.

Increasing the use of recycled metals is a great example of how old economy tools can lead the way to decarbonization of the new economy.

Let's turn now to slide eight to review the strategic actions, we have underway, which are aligned with these long cycle trends.

This quarter's results reflect benefits from our strategic actions to leverage decarbonization trends, including increased customer demand for recycled metals and product optionality as well as productivity and volume growth initiatives to drive expanded profitability.

There are three examples I'd like to highlight this morning first our acquisition of eight metals recycling facilities from Columbus recycling, which expands our platform and a robust southeast regional market with meaningful synergies can.

Combined with our existing facilities. This acquisition increases our footprint to 22 operating facilities in the South East and 102 across North America.

On an annual basis. These operations should increase our total ferrous sales volumes by about 7%.

We also continued to progress our technology investments in advanced metal recovery systems at our major recycling operations, extracting more nonferrous metals, including copper and aluminum from our trading activities as a significant value added process and is directly aligned with global demand trends we.

Spec the benefits from these projects to increase our nonferrous volumes and revenues to lower our operating costs and improve our margins to expand our product offerings and customer base and to support our sustainability objectives of increasing recycling and reducing waste.

And third our productivity initiatives that we undertake as part of our continuous improvement culture.

This year, our focus is on efficiencies and processing procurement and pricing to offset the inflationary environment that we're all experiencing a record first quarter results benefited from our team's skill and focus on this third leg of our strategic plan.

Now before turning it over to Richard I'd like to highlight that on December 8th we experienced a fire at our metals recycling facility in Everett, Massachusetts.

There were no injuries and property damage and loss were limited to our facilities shredder equipment and building.

There was also no impact to our first quarter results because of the incident occurred after the end of the quarter.

Based on our current repair schedule, we expect to resume shredding operations within this quarter. We also expect that our insurance will cover most of the repair and replacement costs and a significant amount of lost income.

So now let me turn it over to Richard for a more detailed review of our financial and operating performance Richard.

Thank you Tamara and good morning all.

I'll begin with an update on our advanced metal recovery Technology initiative.

We continue to progress the deployment of new technologies and several of our major facilities.

Well done.

Systems within or is there still vibrant implemented on openreach.

Okay.

What's the remainder in construction or in impairments in process.

December we completed construction of an additional advanced copper separation system, there's no operational testing and that we expect will begin processing material during the balance of the second quarter.

The new technology implemented to date.

Has already increased or product optionality.

During the fourth quarter, we exports as well.

Millions of high quality, new products, including Twitch and Chaco.

It must be really more systems increased production extract more metal.

Fine.

We expect to increase the trend of additional nonferrous recovered from shredding towards our target of 50 million posts per annum.

Would represent an increase in non fatal some stretching of approximately 22%.

Subject to no further COVID-19 related delays to construction ultra remaining Paramount we are targeting rule out all our remaining installations by the end of fiscal 'twenty to 'twenty two.

We continue to expect total capital investment in the range of $115 million include.

Including the final Bill.

All of us.

And the remainder of fiscal 'twenty two.

Now, let's turn to slide 10.

Our consolidated results first seals on the market dynamics.

Our adjusted EBITDA was $60 per ferrous ton.

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First quarter.

On a year over year basis. This result was higher by $2 or 70%.

The improved performance was driven primarily by higher average.

Selling prices increased sales volumes for ferrous and nonferrous.

Productivity improvements.

Initial contributions from Columbus recycling.

A higher contribution from our steel mill, including vivo indoors or insurance recoveries recognized in the fourth quarter.

These benefits were partly offset by the impact of supply chain disruptions.

More prices for platinum group metals.

Increased SG&A expense, reflecting higher inflation.

Tight labor market.

Average net selling prices were up by 66% year over year.

The last thing parents selling prices were at current levels was back in fiscal 11.

Compared to buying vein or margins per ton in the fourth quarter were over 40% higher.

Which can be primarily attributed to our multiyear focus on productivity on the benefits of our commercial initiatives when a bipolar drum seals diversification.

Supply chain disruptions contributed to several over contracted shipments for November being delete include.

Including her ferrous nonferrous and finished steel products.

The disruptions to bulk ships containers trucking unbelievable.

Personally impacted our EBITDA compared to the basis of the quarterly outlook that we provided back in October.

Ferrous sales volumes were up year over year by 9% with our rone hub of the increase coming from the first two months of operations of Columbus recycling.

Compared to our outlook.

Delete shipments of contracted seals for November.

Adverse impact on our ferrous volumes of approximately 37000 tons.

We sold recycled finished seven countries with Vietnam, Turkey, and South Korea, being the largest skills destinations in the quarter.

The impact of average inventory accounting was neutral compared to benefits of $2 per person in the prior year quarter.

Now, let's move to slide 11.

The north ferrous sales under market dynamics.

Average net selling prices for nonferrous were up by 64% year over year and recycled copper aluminum zorba traded at prices that were at or near multiyear highs.

Nonferrous sales volumes rose year over year by 11% with our own half of the increase coming from Columbus recycling.

However, compared to our outlook.

Increased challenges in securing containers the lead shipments over 12 million posts contracted sales originally planned for November.

We sold our nonferrous products to 15 countries with the mutual destinations being the United States, India and Malaysia.

Now, let's move to slide 12 to discuss our steel mill performance on the West Coast markets.

Finished steel sales volumes of 99000 tons were up sequentially by 53% as we continued the production ramp up that had begun in mid August.

Average selling prices for finished steel were up year over year by 58%.

In the fourth quarter reached their highest ever.

These price increases reflected robust west coast demand.

Through of higher input costs, including for scrap.

Although consumables.

Average rolling mill utilization for the quarter was 17, 8% and reached 91% in the month of November reflecting an increasing trend.

In the quarter.

By the end of the first quarter, we have made strong progress on rebuilding of inventories old village and finished goods unexpected to be back to a normal inventory level during the second quarter.

Now, let's move to slide 13, and discuss cash flow capital structure and our outlook for <unk>.

It'll expenditures.

Our first quarter has seasonally more operating cash flow due to the cash P. M in November each year.

Incentive compensation accrued in the previous fiscal year.

The first quarter of fiscal 'twenty two was further impacted by the rebuild of inventories at the mill, which added $17 million to the increase in working capital during the quarter.

But the chart on the top left shows.

We have a multiyear track record of strongly positive operating cash flows on an annual basis.

Based on our current performance levels. We expect this annual trend to continue for fiscal year 'twenty to 'twenty two.

Net debt increased to $241 million, reflecting our investment of $114 million to acquire assets from Columbus recycling.

In the fourth quarter, we received.

Millions of dollars of.

The initial cash advances from our mill shooters.

All of us up mode.

$14 million has been recognized through our income statement, including $3 million in the first quarter.

The recognition of the remaining $60 million through our income statement is expected to occur over several quarters.

Net leverage on the quarter and was 22% and our ratio of net debt to adjusted EBITDA was 0.7 inks.

Yeah.

What school 2022 of whom.

We expect to make capital expenditures in the range of $150 million to $160 million, just under half will be for growth projects, including completion of our technology initiatives.

Investments to support volume growth.

Post acquisition Capex at Columbus recycling.

The remaining fiscal 'twenty, two capex will be for maintaining the business and for investments in environmental really to capital projects.

Capital expenditures in the fourth quarter totaled 50 million.

Net of insurance recoveries.

Our effective tax rate was an expense of 19%.

Our adjusted fourth quarter results and included $3 million of discreet tax benefits arising from Vas thing.

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We look forward to providing an update on our expected second quarter performance around the end of February.

I'll now turn the presentation back over to Tamara.

Thank you Richard the record first quarter operational and financial results, We announced this morning reflect our significant progress in expanding profitability, increasing our volumes and investing in technology to support our sustainability objectives of increasing recycling, reducing waste and in.

Hansen, our product offerings, we have a strong balance sheet a track record of delivering annual positive 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.

We are well positioned to benefit from the continued growth in U S and global E. F. Steelmaking capacity the global focus on decarbonization, the increased metal intensity of low carbon technologies and additional steel and recycled metals demand driven by the recently passed 1.2 trillion dollar U S.

Infrastructure Bill.

Clothing I'd like to thank our employees once again for their outstanding performance. They've demonstrated why we have continued to be a leader in the recycling industry for over a century.

And now Jonathan let's open up the call for questions.

Certainly ladies and gentlemen, if you have any questions. At this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the penalty. Our first question comes from the line of Michael Alicia from Keybanc. Your question. Please.

Hey, guys good morning.

Firstly I just wanted to ask on the just what you're seeing here in the near term in the scrap market in terms of pricing.

Just as of late we've seen some softening in Paris.

And how should we think about the impact on the cost side for spreads in the steel business as we look into the second quarter.

All else equal.

Sure. So let me look at it or take you through it East coast West the West Coast. If you will as you know on the domestic side domestic as pricing. This week, so I'm not going to comment on domestic but on the export side. If we look off the east coast and we look at Turkey demand buying patterns are remaining consistent.

And I'm sure that you've seen them in fact, I think he reported you know in 2020 one Turkish steel production was up I think almost 20% which was at record highs. So we're seeing consistent buying patterns off the west coast demand is broad based and what's interesting is that normally we see a bit of sort.

This time of year due to the ripple effects of the Chinese new year, but this year inquiries are coming earlier due to buyers concerns regarding supply chain impacts. So so from that perspective, what we see is increased demand on a year over year basis strong.

<unk> for our business and the challenges is really in logistics I'm not not a question of demand.

Got it and then sticking with the the the cost side and the steel business I wanted to ask on the cost pressures you're seeing in fiscal 'twenty, two whether that be alloys electrodes electrodes labor energy or otherwise, but.

And if you could frame it.

Essentially the per ton impact that you're expecting there on a year over year basis within steel in fiscal 'twenty two versus fiscal 'twenty one.

So let me let me see if I can address it broadly and then Richard why don't you add any specifics that you like broadly are we focus on our productivity initiatives to combat inflation and so as I mentioned in the prepared remarks, we have made impacts already this year and.

Driving benefits from our productivity initiatives to combat inflation.

Yeah. The primary areas that we're seeing it and it is a non trade procurement, yes, you mentioned in labor.

And obviously I'm very much and and transportation logistics, Richard if you want to add anything to it.

Yeah. Good morning, Michael I mean, I think I would just add that you know.

We're seeing in steel prices.

You know record labels.

And the West Coast and you know these these these cost increases that we're talking about.

You know the eventually you know the pass through on that.

On the pricing side, such as Freeport for example.

And I would also note that.

As far as like energy Cool school via a actually a very small proportion.

The overall cost of goods sold.

The mill, so we're not seeing a.

I changed with some material enough for us to you know.

Merit, calling out on that site.

Yeah.

Okay, and just lastly for me I wanted to ask about the nonferrous trade dynamics, given the the automotive supply chain issues that we've been facing.

And are you seeing any easing there in the supply chain bottlenecks on the auto side in and wanted to get your take on how you see that playing out over the course of the year as it impacts your business.

Thanks.

Sure so on nonferrous in terms of our purchases and sales where obviously.

You mentioned earlier seeing supply chain constraints availability of containers.

Yeah based significant and you know clearly contributed to a delay in shipments in Q1.

But what I'm you know what I'll reiterate is that demand continues to be strong and so on a year over year basis.

We're seeing higher demand and expect to see higher contracted sales are but but there is you know obviously availability of containers and it does create a backlog inflows.

Thank you.

Thank you. Thank you.

And once again, if you have a question at this time. Please press Star then one.

And this does conclude the question and answer session of today's program I'd like to hand, the program back to Tamara language for any further remarks. Thank.

Thank you Jonathan and thank you everyone for your time today, we look forward to speaking with you again in April when we report our second quarter results in the end from say stay safe and stay well. Thank you.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Yeah.

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