Q3 2022 Schnitzer Steel Industries Inc Earnings Call
Good day, and thank you for standing by welcome to the Snitzer Steel's third quarter 2022 earnings release call and webcast.
At this time all participants are in a listen only mode.
The speaker's presentation there'll be a question and answer session to ask a question during that session you will need to press star one on your telephone. Please be advised that today's conference is being recorded and if we require any assistance during the call. Please press star zero.
I would now like to hand, the conference over to your Speaker today, Mr. Michael Bennett of Investor Relations. Mr. Bennett the floor is yours.
Thank you, Chris 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 third quarter of fiscal year 2022.
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.
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 noted on slide two we may make forward looking statements on our call today, such as our statements about our targets volume growth and margin.
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.
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 Officer.
Thank you Michael Good morning, everyone and welcome to our fiscal 'twenty, two third quarter earnings call.
Before we begin our formal presentation I would like to congratulate our employees on another quarter of excellent operational and financial achievements.
After delivering record results for the first and second quarters of this fiscal year. Our team did it again this quarter's adjusted EBITDA represents the best third quarter in our company's 116 year history.
To all our employees. Thank you you have continued to exhibit resilience nimbleness and commitment to excellence that has been hallmarks of our company for over a century.
On our call today, I'll review, our quarterly financial results and the trends affecting our business.
I'll also provide an update on the strategic initiatives, we have underway to meet the increasing demand for our products and services and to create long term value rich.
Richard will then provide more detail on our investment financial performance and capital structure.
I'll wrap up and then we'll take your questions. So, let's turn now to slide five to get started.
As I, often say sustainability is at the core of what we do and how we operate and it has been since our founding in 19 is six our sustainability framework of people planet and profit is the foundation upon which our results are achieved and I'd like to highlight two examples of the.
The progress we made on our planet goals during the third quarter.
In May the U S. Environmental Protection agency recognized our Oakland, California facility as part of the agency's Green power partnership.
Our open recycling facility uses more than 18 million kilowatt hours of Green power annually enough to meet two thirds of the facility's total electricity use.
By voluntarily choosing to use green power, which is renewable electricity with environmental benefits above state or local requirements. We are helping to advance the market for green power and the development of renewable power sources.
This partnership is similar to other programs, we participate in such as the Tacoma public utilities Evergreen options program, which provides our Tacoma, Washington facility with electricity from majority of carbon free hydro power.
Through these partnerships, we are able to advance our sustainability goal of maintaining 100% net carbon free electricity at our operations.
I'm also pleased to share our progress on our goal to deploy an ISO certified environmental management system by the end of fiscal 'twenty. Two in May our initial six sites passed the two states audit process and have beneficially ISO certified from here, we will begin the extensive process of certifying the <unk>.
ASP of our 100 plus sites over the next four years to deliver on our commitment to responsible operations and environmental stewardship.
You can see on this slide six more detail regarding 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.
Now, let's turn to slide seven.
For a review of our third quarter results.
Earlier this morning, we announced record third quarter adjusted earnings per share of $2 59.
These results are almost double our second quarter, and our 18% higher than a year ago.
Our third 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.
Our nonferrous and finished steel volumes increased sequentially by 37% and 27% respectively.
As logistics and labor constraints improved.
Our ferrous volumes, which increased 5% sequentially were lower than planned due to the slower export demand off the east coast that occurred during the latter part of the quarter.
Our EBITDA per ton margin of $105 was the highest Q3 in our company's history stronger market conditions together with increased volumes, including the benefits from Columbus recycling, which we acquired at the end of Q1.
Drove a significant expansion in our metal spreads and EBITDA.
At the end of April we also acquired the assets of Oncor recycling in Georgia, which included our first metal shredding operations in the southeast.
Combined with Columbus recycling, we now operate 24 recycling facilities in the expanding industrial southeast region.
During the quarter, we generated positive operating cash flow and returned capital to our shareholders through the repurchase of almost 1% of our outstanding shares and the issuance of our 113th consecutive quarterly dividend.
Our record performance through the first nine months of fiscal 'twenty. Two is reflective of the drivers of demand set forth on the next slide eight.
The structural trends underpinning higher demand for recycled metals and low carbon finished steel include among other things <unk>.
Significant growth in Eas production, which uses recycled metals as its primary raw material.
Carbonization trends, which are driving the increased use of recycled metals by.
And in many other manufacturing production processes.
The effects of years of Underinvestment, and industrial metals, and mining, which have created structural shortages in metals like copper.
The transition to low carbon technologies, which are more metal intensive than the technologies they are replacing.
And the U S infrastructure Bill.
It is expected to materially increase demand for finished steel and recycled ferrous and nonferrous metals.
So now, let's turn to slide nine to review pricing trends.
Demand for long products continued to rise during the quarter with prices, reaching their highest levels on record.
Total U S. Construction spending continued to show strength.
With the three month total spend through April 22, rising by almost 13% year over year.
Nonresidential and infrastructure projects on the West Coast show, particularly strong growth.
We expect to see robust demand in the construction markets continue as our customers' order books remains strong and rising activity related to the U S infrastructure Bill is expected to materialize in late 2022 early 2023.
With the increased focus on low carbon steel, our Oregon steel mill is well positioned to meet this demand. Our mill is one of the very few whose primary energy source is hydro electricity.
Combined with the use of recycled metal as its primary raw material.
<unk> made in our electric arc furnace has an exceptionally low carbon impact as compared to the industry average in March we launched a line of net zero carbon emissions products branded green steel to support the ever evolving needs of our customers.
If we turn to slide 10, we can review ferrous and nonferrous pricing trends.
Our third quarter began with market prices for recycled ferrous metals, reaching historically high levels in excess of $650 per ton.
Driven by the initial market disruption associated with the Russian War in Ukraine.
By the end of the quarter prices had dropped to a range of 450 to $500 per ton driven largely by China's lockdowns slower purchases by Turkey, low cost Russian billets and ample scrap flows.
Since the end of the quarter, we've seen prices trade in the range of 330 to $350 per ton off the east coast to Turkey.
With prices slightly stronger off the west coast.
Copper and aluminum scrap prices also began the quarter at or near multiyear highs.
Benefiting from the tailwind of broad based demand low global inventories supply chain disruptions and high inflation.
Similar to ferrous nonferrous prices declined in the latter part of the quarter to levels generally consistent with their 12 month average since.
Since the end of the quarter nonferrous prices have further softened due primarily to higher energy prices and slow demand from China.
Supply flows during the quarter were steady but.
But it's tightened since the end of the quarter as suppliers feel the impact of higher fuel costs and lower metal prices.
The ferrous and nonferrous price changes during the quarter were significant and recessionary fears and economic growth concerns remain at the forefront of global markets.
Headwinds from China's Covid Lockdown, the Russian war in Ukraine, and the unsteady global economy are creating a tough short term environment for metals.
However, it is important to remember that the strong demand trends remain intact. There is increasing demand for recycled copper aluminum and low carbon steel as governments and others focus on renewables electric vehicles and efficient responsible low carbon intensity.
Steelmaking.
As we look at the fourth quarter, we expect our ferrous sales volumes to increase sequentially as several shipments planned for Q3 move into Q4.
And excluding the significant impact of average inventory accounting, resulting from the sharp drop in prices, we expect our EBITDA per ton to be similar to what we achieved in Q4 of last year.
So, let's turn now to slide 11 to review the strategic actions. We have underway that are aligned with these positive structural trends to create long term value.
Our strategic priorities and progress can be summarized in four buckets first 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.
Of the 13 systems, we have planned eight are either operational or in commissioning with the remainder in the construction of our permitting process.
Second ferrous volume growth with a fiscal 'twenty three target of five 3 million tons are annualized 12 month run rate, including our recent acquisitions is now $4 8 million tonnes.
Third expansion of our products and services to meet the evolving demand for recycled metals, such as the launch of our net zero carbon emissions Greenfield products and the reverse logistics services, we provide to manufacturers and retailers and fourth.
Productivity initiatives that we undertake as part of our continuous improvement culture, where our focus is on efficiencies and processing procurement and pricing. This focus has enabled us to partially offset inflationary pressures on operating costs.
Now, let me turn it over to Richard for more detailed review of the contributions from our strategic initiatives and our financial and operating performance rich.
Richard Thank.
Thank you Tamara and good morning, I'll begin with an update on our recent acquisition of the asset So encore recycling, which was completed on April 29.
<unk> is based in the grease or Atlanta Metro area and encompasses two recycling facilities, including our metal trading operation on our recycled auto parts Center.
The acquisition of Oncor establishes our shredding operations in the southeast region and builds upon although our recent strategic investments, including a state of the art heavy media plant in Macon, Georgia.
And our October 2021 purchase of recycling facilities from Columbus recycling.
Our southeast regional footprint mode comprises 24 recycling facilities across Alabama, Georgia, Kentucky, Mississippi and Tennessee.
The purchase price for <unk> assets was $55 million, which reflects our forward earnings multiple of less than five banks.
In 2021, the oncor facilities processed approximately 90, <unk> ferrous tons 14 million Nonferrous poems on 20000 end of life vehicles.
Nevertheless, consciously 13 to discuss progress on our advanced metal recovery technology initiatives.
We continue to progress our technology deployment, which includes installation of advanced separation systems for aluminum and copper.
As well as systems for primary nonferrous recovery from our shredding operations construction.
Construction is nearing completion on two new systems with both expected to start commissioning during the month of July .
These includes our primary non ferrous recovery system based on the East coast.
On advanced aluminum separation system in the Western U S.
We will know how to advanced aluminum separation systems, one on each side of the country.
When commissioning and ramp up of the new system is completed this will give us increased optionality to upgrade the vast majority of our mixed nonferrous products, such as zorba into higher volume furnace ready products.
Our completed systems include three advanced copper separation systems that are fully operational in different regions of the country, and which provides us with the optionality to upgrade lower volume cohort commodities into higher quality products, such as corporate shops.
We are targeting construction of our remaining five solutions by early in calendar 2023. This timescale for completing construction together with longer commissioning and ramp up periods for certain of our new systems means we are now targeting full run rate benefits of $10 of EBITDA per tonne in fiscal 2020.
Before with slightly less than half of that targeted for fiscal 2023, achieving the targeted benefits will require construction impairment timelines volumes and mix of recovered non ferrous on system performance to be in line with our expectations.
We expect the overall capital investment to be in the range of $120 million. This includes 5 billion doors in the fourth quarter and the remaining balance of $50 million in fiscal 'twenty three.
Now, let's turn to slide 14 to discuss our consolidated results first sales on the market dynamics.
Our adjusted EBITDA of $119 million was our best ever first quarter and represented $105 per ferrous ton on a sequential basis. This result was higher by $44 million and was driven primarily by increased sales volumes on higher.
Average net selling prices for ferrous nonferrous and finished steel.
The quarter also included benefits from expanded metal spreads late in the quarter from previously contracted sales at higher prices.
And in addition from seasonally higher retail sales and an increased benefit from average inventory accounting, which was $4 per ferrous ton compared to $1 in the second quarter.
The quarter included the impacts of higher inflation on our operating cost primarily for labor energy logistics and waste disposal, we were able to partially mitigate these cost increases through our productivity initiatives and in the third quarter. Our results benefited from improved procurement efficiencies and other.
<unk> improvements.
For Ocean going free has also increased due to higher fuel prices volatility created by the Russia, Ukraine crisis and also from the Covid Lockdowns in China. The cost of free is included within our selling prices for export shipments.
Average net ferrous.
Selling prices were up by 22% sequentially and by 55% year over year.
After reaching multiyear highs early in the quarter ferrous prices, then fell due to uncertainty over global steel demand and ample levels of scrap supply.
Our ferrous sales volumes were up sequentially by 5%, but lower year over year by 7% as a slowdown in export demand resulted in delays to contracting and shipping that pushed for bulk cargos into the fourth quarter.
Third quarter sales volumes include contributions that came from Columbus recycling on from our first month of ownership of Oncor recycling.
Reflecting the slowing of export sales and the increased size of our domestic business, we sold 44% of our fitness volumes to the U S market up from 34% in the prior year quarter.
Our largest sales destinations for ferrous exports in the quarter.
South Korea, Turkey and Bangladesh.
Now, let's move to slide 15 for an update on nonferrous sales under market dynamics.
Average net selling prices for nonferrous were flat sequentially and up by 15% year over year.
Coming into the quarter prices for recycled copper aluminum zorba, where near multiyear highs, but then trended down.
Mena extended Covid, Lockdowns, which had an adverse impact on global demand.
Nonferrous sales volumes rose sequentially by 57% on year over year were up by 29%, including the contributions from both Columbus recycling on oncor recycling.
The increased volumes reflected the sell through of inventories and a pivot to selling a bigger portion of our nonferrous. The U S domestic market based on attractive economics and better logistics.
We sold our nonferrous products to 16 countries with the major export destinations being India, Malaysia, and South Korea.
Product mix was highly diversified with sales absorb representing 33% of our nonferrous volumes aluminum, 25% copper, 13% Twitch, 8% on others, making up the balance of 21%, including stainless Zurich and other nonferrous metals.
Let's move to slide 16 to discuss our steel mill performance and West Coast markets.
Finished steel sales volumes of 135 closing tons were up sequentially by 27% as we benefited from strong construction demand and the resolution in April of our concrete drivers' strike in Washington steam the hard delete construction projects for some of our customers.
Reflecting the strong demand.
Selling prices for finished steel were up year over year by 41% and in the third quarter reached the highest ever level.
Average rolling mill utilization for the quarter was 96%, which represents a strong sequential increase from 86% in the previous quarter.
Now, let's move to slide 17, and discuss cash flow capital structure, and our outlook for the fourth quarter.
In the third quarter, we had positive operating cash flow of $45 million as profitability more than offset the increase in working capital due to the higher price environment and increased inventories.
Net debt was $306 million, which was up sequentially, primarily due to the acquisition of assets of oncor recycling.
Net leverage was 24% and at quarter's end, we had a ratio of net debt to adjusted EBITDA of zero point, Maine inks.
Capital expenditures in the fiscal year to date totaled $90 million for fiscal 2022 as a whole we expect to make capital expenditures in the range of $130 million to $150 million.
Around a third will be for growth projects, including on our technology initiatives investment to support volume growth and post acquisition Capex the balance of fiscal 'twenty. Two capex is for maintaining the business and for investments in environmental related capital projects.
During the quarter, we repurchased approximately 244000 of our class a common stock for approximately $10 million.
<unk> tax rate on our adjusted third quarter results was 21% this was lower than our expectation due to discrete benefits from tax credits.
Although there are still two months left in the quarter I'll now turn to our outlook for the fourth quarter, which is based on current market conditions and does not reflect any further disruptions to markets supply flows or logistics.
We expect our ferrous and nonferrous sales volumes to increase year over year by approximately 10% <unk>.
Including benefits from four bulk ferrous cargos the lead from the third quarter.
We expect finished steel sales volumes to be in line sequentially and to be more than double last year's fourth quarter, which was impacted by the fire OTT.
Was the sharp drop in market prices, we expect a significant accounting detriment from our average inventory costing method and the range of $20 per ferrous ton.
While we adjust our cash purchase costs for scrap immediately to react to changes in market selling prices.
The average inventory cost that is used for calculating costs of goods sold.
Just more slowly.
Excluding the impact of average inventory accounting, we expect EBITDA per ferrous ton to be similar to last year's fourth quarter, which was $65.
Due to our outlook for higher shipped ferrous volumes and <unk>.
The lower price environment, we expect these factors to create significant benefits to working capital leading to strongly positive operating cash flow, which we expect to be we'll have both the third quarter.
We expect our effective tax rate for the fourth quarter to be 27% subject to our financial performance.
Given significant changes in markets.
Luke demonstrates the resilience of our business model, which includes our diversified sales platform integrated operations and their ability to adjust purchase prices as well as to produce positive operating cash flows and a variety of market conditions.
I'll now turn the call back over to Tamara.
Thank you Richard our record operational and financial results this quarter and for the first nine months of our fiscal 'twenty to reflect our strong profitability and the significant progress we've made on our strategic initiatives to increase our volumes and the products and services, we can offer our customers.
<unk> current market headwinds, our Q4 outlook reflects robust demand for finished steel products and positive structural demand for recycled metals we.
We are well positioned to benefit from the structural trends of continued growth in U S and global Eas steelmaking capacity.
Global de carbonization increased metal intensity of low carbon technologies, and additional steel and recycled metals demand driven by the one two trillion dollar U.
<unk> infrastructure Bill we have a strong balance sheet, a track record of delivering annual positive operating cash flows.
And an ability to invest in the growth and productivity of our company, while returning capital to our shareholders through our dividend and share repurchases in closing I'd 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.
Century, and now operator, let's open the call for questions.
Thank you.
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Our first question comes from Michael the shock.
Keybanc capital markets.
Your line is open.
Hey, good morning, Good morning, I wanted to ask I wanted to ask on your criteria on M&A when you're evaluating transactions what are the most important metrics you look at.
Given the commodity price volatility in earnings fluctuations, we've seen over the past few years, what historical timeframe do you use to evaluate some more normalized valuation.
Even given the oncor purchase price was $55 million, you had said less than five times for 90000 ferrous tons.
Trying to think of how you're thinking about that and then going forward what criteria Youre looking for an M&A transaction.
Sure Michael.
Let me start by.
By addressing it generally.
When we're looking at acquisitions and in light of the business in the industry. They were and we look at valuation on a through the cycle basis. So it really depends upon when the cycle. We're looking at an acquisition target to determine where we are through that through the cycle on the encore.
Acquisition.
That Richard mentioned in detail.
As Richard.
Indicated on a forward EBITDA multiple that is below five and our historical.
Our multiple is.
Five 5% to seven.
Was below our historical.
Multiple and we look for strong franchise operations.
In this case.
The oncor transaction gave us the opportunity to acquire our first shredding operation in the southeast. So we now have 24.
Our facilities in the southeast and that creates tremendous amount of.
Synergies for us in operating leverage because now we've got a shredding facility that can support our recycling facilities.
Anything that you want to add to that yes.
Thanks for your question Michael.
<unk> is that we've also got some additional new technology and associates region. So the new <unk>.
Acquired oncor assets will be a source of supply of Zorba to our heavy media plant that's in the making Georgia area. That's only about 70 to 100 miles away and also we have a wire actual port operation operation in the southeast to sell those goods technology synergies there as well as.
From the overall integrating.
One quarter into our enlarged southeast operations building on our acquisition of Columbus recycling last October .
And what's your strategy behind M&A.
You are building out that presence in the southeast region.
How much more do you see to go there or is there something that you you might be targeting.
That's my first question and then also in the initial release when you announced the Oncor you had alluded for the need of additional investments like the shredder enclosure emissions control system storm water infrastructure in the refrigerant recovery program.
How are you thinking about those maybe the timeline for those investments and is there a way to frame the capex associated with that as we think about fiscal 'twenty three capex.
Sure. So I'll take the first one and then Richard why don't you take the Capex question.
On the first.
Michael as you know.
M&A.
It tends to be opportunistic in terms of what is available at any point in time.
We do believe that the that the industrial activity steelmaking activity in particular in the southeast is very strong. So that's clearly a region that we've been targeting for quite a long time and Thats why we were particularly excited to have the opportunity to identify.
A a shredder.
Relatively new.
And.
And well position well situated.
That we could that we could acquire at an attractive and accretive.
Multiple yes I died.
Michael one of our criteria is looking.
To achieve.
Our retail and our cost of capital.
For the future ownership.
Any new acquired business and that includes any post acquisition and Capex that we spend.
<unk>.
And you mentioned the environmental investments, we expect to meet that.
Those those investments.
We'll likely be needs over more than a one year period, and we will be a <unk>.
Moving on up the owner expected.
Fiscal 'twenty three capex, when we announce our full year results.
At least in October .
Okay and lastly for me just on some of the logistics constraints they seem to be easing at least to some extent as evidenced by your strong nonferrous shipments in the quarter could.
Could you talk to what Youre seeing on the logistical front.
Given the inflationary and supply pressures.
Maybe the easing of the cadence of easing that youre seeing there.
Sure.
So we did see easing and.
And container availability during Q3 part of that.
Attributed to China's slowdown and some more availability of.
Of containers and as you know freight costs are fundamentally a pass through.
And.
In our in our in our sales activity so.
So you can you can see that come.
Coming through.
Those movements coming through as they adjust.
On the bulk side the freight has been has been steady and and available.
Got it thanks for taking my questions.
Thank you. Thank you.
Thank you.
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And again Thats Star one.
Okay.
Yeah.
Okay.
And speakers I am seeing no questions in the queue. At this time I will turn the conference back over to MS. Tamara Lundgren.
No closing remarks.
Thank you. Thank you everyone for your time today, we look forward to speaking with you again in October when we will report our fourth quarter results in the interim stay safe and stay well. Thank you.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
Yes.
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