Q2 2022 Schnitzer Steel Industries Inc Earnings Call

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Thank you for standing by and welcome to this Mr. Steel's second quarter 2022 earnings release call and webcast. At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.

I ask a question at that time. Please press Star then one on you touched on the telephone. If your question has been answered and he would like to remove yourself from the queue. Please press the pound key and now I'd like to introduce your host for today's program Michael Bennett.

Mr Relations. Please go ahead Sir.

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

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 steel Dot com.

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.

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 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'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.

Yes, Sir.

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

Let me begin with our formal presentation.

Like to congratulate our employees on achieving another record this quarter's adjusted EBITDA represents the best second quarter in our company's history to all our employees. Thank you.

We have continued to exhibit resilience creativity and commitment to excellence.

Been hallmarks of our company for over a century.

Also showing your generosity and humanitarian spirit.

Russia is an invasion of Ukraine enters its second month, our company and our employees have stepped up to offer many forms of aid and support.

Both to those forced to flee and to those who remain thank you.

Our call today, I'll review, our quarterly financial results and the trends affecting our business I will also provide an update on the strategic initiatives, we have underway both to meet the increasing demand for our products and services and to create long term value.

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 I, often say sustainability is at the core of what we do and how we operate and has been since our founding and $19 six.

Since our last earnings call, we've been recognized by several well respected organizations for various aspects of our sustainability program.

Ethisphere named US one of the world's most ethical companies for the eighth consecutive year.

Corporate Knights ranked US number 15 on their global 100 list of the world's most sustainable companies highlighting the increasingly critical role of our work and the global transition to a low carbon future.

In March I was also pleased to announce the launch of Green steel a line of net zero carbon emissions products from our Cascade Steel mill located in Oregon.

Cascade has created some of the lowest carbon emission steel products in the world.

Through Eas technology powered primarily by carbon free hydro electricity.

The introduction of this new product line exemplifies cascades long longstanding reputation for delivering innovative products that meet the ever evolving needs of our customers.

Now you can see on this slide our multiyear people planet and profit goals that underpin our sustainability framework I encourage you to visit our website to view our latest sustainability report, which describes our goals in more detail.

Now, let's turn to slide six.

After delivering record first quarter earnings earlier. This morning, we announced our fiscal 'twenty two second quarter adjusted earnings per share of $1 38.

Together these results reflect the highest first half performance in our company's history.

Our second quarter results benefited from strong global demand for recycled metals with average selling prices for ferrous nonferrous and finished steel products at or near all time highs.

Similar to the first quarter, our year over year, ferrous and nonferrous sales volumes grew increasing by 10% and 8% respectively.

Our results included a full quarter contribution from our acquisition of the Columbus recycling assets, which we completed in October .

Finished steel sales volumes increased sequentially as we completed the ramp up of steel mill operations after their outage.

Generated positive free cash flow and our balance sheet remains strong we repurchased 200000 shares of our stock during the quarter and we continued our uninterrupted record of returning capital to shareholders through the issuance of our 112 consecutive quarterly dividend.

While we continue to be impacted by supply chain disruptions global demand for our products and services remains very high our outlook is strong and we expect our third quarter results to benefit from both higher sales volumes in all our product lines and the strong current price environment.

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

As you can see on this slide during Q2 market prices for recycled ferrous metals remained at historically high levels with a dip in the beginning of the quarter followed by a strong reversal towards the end.

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

Demand for long products continue to rise during the quarter with prices, reaching their highest levels on record primarily driven by increases in construction spending.

Since the end of the second quarter, we've seen a sharp increase in ferrous pricing driven by the lack of semi finished and pig iron exports from Ukraine and Russia.

Supply flows are strong supported by higher prices spring weather increased industrial activity and slightly better trucking availability.

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

Demand for recycled metals is underpinned by both short term and long term drivers.

In the current environment there are several.

First the Russian invasion of Ukraine, which has led to the subsequent shortage of semi finished and alternative metal units from the Black Sea region.

Second the continued pent up demand for autos appliances, and other products without a corresponding recovery in supply.

Third the effects of the years of Underinvestment in industrial metals, and mining, which has created a structural shortage and lastly.

The recent Covid lockdown in China, which covers a material portion of their metal production capacity.

In the longer term.

Shifting to low carbon technologies is widely acknowledged to be more metal intensive.

Carbonization is a powerful structural driver of demand for recycled metals, which require less carbon to produce than mine metals.

Use of recycled metals is recognized as an important strategic solution for.

For companies industries, and governments that are focused on carbon reduction and are committed to reducing material directed to landfills.

We can see how these trends have translated into higher ferrous scrap metal demand in the U S Europe and China by looking at the charts on this slide.

<unk> steelmaking capacity, which uses scrap as its primary raw material is projected to increase significantly over just the next few years in all three regions.

In addition, there is increasing demand by steelmakers using BLS.

Maximizing the use of scrap to reduce the higher carbon footprint associated with their steelmaking process in.

In summary, both near term and longer term trends are supporting higher demand for recycled metal products.

And pricing peaks and troughs continued to reflect higher levels than we've seen in the past decade.

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

Our strategic priorities can be summarized in four buckets <unk>.

Technology investments in advanced metal recovery systems at our major recycling operations to enable us to extract more nonferrous metals, including copper and aluminum from our shredding activities.

Ferrous volume growth with a fiscal 'twenty three target.

Five 3 million tons.

Representing an average annual 4% increase from our fiscal 19 baseline.

Expansion of our products and services to meet the evolving demand for recycled metals, such as our Green steel launch and the reverse logistics services, we provide to manufacturers and retailers.

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

Where our focus is on efficiencies and processing procurement and pricing to offset the inflationary environment that we're all experiencing.

As you can see on this slide we have been making significant progress in all four areas.

We are on track to reach our goals, which in aggregate. Once completed are expected to expand our EBITDA per ferrous ton margins by approximately $17 per ton.

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

Thank you Tamara good morning, all.

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

We continue to progress the deployment of our new technologies.

Status of the therapy, new systems within the OTA initiative calls for our fully operational with two more systems currently in the ramp up phase.

Construction is progressing on four more systems with completion expected on three of these by the summer.

The permitting process is underway.

On the remaining three systems.

One of the systems currently under construction as an advanced aluminum separation system in the Western U S.

We already have one such system up and running in the southeast.

Which is giving us the ability to produce higher margin furnace ready products by upgrading although scalable commodities.

During the second quarter, just under a third of our nonferrous recovered from shredding was processed through one of the new systems that are still in the ramp up fees. Our ultimate target is to increase non finished recovered from shredding.

Ultimately, 20% or around 50 million posts on an annual basis.

We are now targeting construction of our remaining installations by the end of calendar 'twenty two.

While we are continuing to make good progress on the rollout. Thus we expect the same scale as a few months lethal than our previous estimate due to longer lead times for equipment and construction of buildings as well as our projected same SKU put obtaining remaining impairments.

We expect total capital investment in the range of $120 million, including around $15 million in the second half of fiscal 'twenty, two and the remaining $10 million in fiscal 'twenty three.

Let's turn to slide 11 to discuss our consolidated results first sales on the market dynamics.

And adjusted EBITDA of $75 million was a record record for our second quarter and represented $70 per ferrous ton.

On a year over year basis. This result was higher by $4 million and was driven primarily by increased sales volumes for ferrous and nonferrous.

Higher selling prices for recycled metals and finished steel and recognition of insurance recoveries.

The quarter also included Detriments from compressed metal spreads late in the quarter.

Supply chain disruptions.

Lower year over year, PGM prices cost inflation, a significant impact from the downtime at the average shredder and a lower benefit from average inventory accounting.

The impact of average inventory accounting was a benefit of $1 per ferrous ton compared to benefits of $10 per ferrous ton in the prior year quarter.

We recognize insurance recoveries of $22 million in the quarter for qualifying losses arising from the fires are steel mill neighborhood facility.

These benefits were significantly offset by detriments associated with the fire, including a $6 million impairment charge over $2 billion for extra costs incurred on the material impacts on our profitability from lost sales of recycled metal, which means a significant.

<unk> portion of the remaining difference.

Average net ferrous selling prices were up by 15% year over year.

And our ferrous sales volumes were up year over year by 10%.

Including contributions that came from Columbus recycling.

These higher sales volumes were despite the impact of the average outage from supply chain disruptions to labor on transportation, including from the oil macro and search.

We sold recycled ferrous to main countries with Bangladesh, Turkey, Vietnam being the largest sales destinations in the quarter.

Demonstrating the diversity of our operating platform, our sales volumes were well balanced between domestic.

Sales to Asia from the West coast facilities.

Sales to the Mediterranean or the Americas from both our east and West Coast export locations.

Normalized move to slide 12 for an update on nonferrous sales and the market dynamics.

Average selling prices for nonferrous were up by 33% year over year.

Recycled copper aluminum and zorba treated at prices that were at or near multiyear highs.

Nonferrous sales volumes rose year over year by 8%, including the contributions from Columbus recycling.

Increased challenges in securing export continuous continued with shipments of 18 million pounds of contracted sales being delayed into the third quarter.

We sold our nonferrous products to 17 countries with the major destinations being the United States, India and Malaysia.

Our product mix was highly diversified with sales of aluminum representing 29% of our nonferrous volumes zorba, 22% copper 16%.

Twitch, 14%.

Others, making up the balance of 19%, including seamless Zurich and led.

Sales of Twitch, which contains the aluminum portion of Zorba has become a more significant product for us and we expect this trend to continue after we implement our west coast advanced aluminum separation plant during the summer.

Now, let's move to slide 13 to discuss our steel mill performance and West Coast markets.

Finished steel sales volumes of 106000 tons were up sequentially by 7% as we completed the ramp up of steel mill operations and rebuild of inventories following the restart of production back in mid August .

Up to last year sales volumes were lower also due to supply chain disruptions.

Closing a concrete workers' strike in Washington steam the delayed construction projects, where some of our customers.

Average selling prices for finished steel were up year over year by 51%.

And then the second quarter reached their highest ever.

These price increases reflects robust west coast demand on the flow through of higher input costs, including for scrap and other consumables.

Average rolling mill utilization for the quarter was 86%.

And by the end of the second quarter, we were back to normal inventory levels.

No.

Move to slide 14 to discuss cash flow capital structure, and our outlook for the third quarter.

In the second quarter, we had positive operating cash flow of $47 million.

As profitability more than offset the increase in working capital due to the higher price environment and the build of mill inventories.

Net debt was $244 million with net leverage of 21% and our ratio of net debt to adjusted EBITDA of 0.7 eggs.

For fiscal 'twenty, two as a whole we expect to make capital expenditures in the range of $130 million to $160 million just under half will be for growth projects, including on our technology initiatives investments to support volume growth and post acquisition Capex at Columbus recycling.

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

Capital expenditures in the fiscal year to date totaled $58 million net of insurance recoveries related to the repair and replacement of damaged property.

During the quarter, we repurchased approximately 200000 shares.

<unk>, 7% of our class a common stock for approximately $8 million.

Our effective tax rate was an expense of 24% on our adjusted second quarter results.

Although there are still almost two months left in the quarter.

I'll now turn to our outlook for the third quarter.

We expect our ferrous and nonferrous sales volumes to each increased sequentially by approximately 15% subject to the timing of shipments.

With the mill inventory rebuild complete we expect finished steel sales volumes to rise sequentially by approximately 25%.

Given the sharp rise in markets, we expect a benefit of average inventory accounting in the range of $5 per ferrous ton.

Current market levels and operating leverage from increased volumes are expected to increase EBITDA per ferrous ton by around 30% compared to the second quarter.

We expect our effective tax rate for the third quarter to be 23% subject to our financial performance.

Our earnings outlook for the third quarter does not reflect any further disruptions to markets or supply chains.

Does not include any projected recognition of corporate insurance recoveries.

Ill now turn the presentation back over to Tamara.

Thank you Richard.

Our record first half operational and financial results reflect our significant progress in expanding profitability, increasing our volumes and investing in technology to support our sustainability objectives.

Creasing recycling, reducing waste and enhancing our product and service 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 continued growth in U S and global Eas steelmaking capacity the global focus on decarbonization.

Kris metal intensity as low carbon technologies, and additional steel and recycled metals demand driven by the one two trillion.

Infrastructure Bill.

Closing I would like to thank our employees for their outstanding performance.

They have demonstrated once again why we have continued to be a leader in the recycling industry for over a century.

So now operator, let's open 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 Hey for your.

Question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

Once again, if you have questions at this time. Please press Star then one.

I'm not showing any questions at this time I would like to hand, the program back to timberland grid for any further remarks.

Thank you operator, and thank you all for listening and for your time today, we look forward to speaking with you again in June when we report on our third quarter results in the interim stay safe and stay well.

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

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