Q2 2023 Schnitzer Steel Industries Inc Earnings Call
Speaker 1: Good day and thank you for standing by. Welcome to Q2 Fiscal 2020 Earnings Call. At this time, our participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star one on your telephone.
Speaker 1: You will then hear an automated message. Your hand is raised to withdraw your question. Please press Star one again. Please be advised that today's conference is being recorded. We would now like to hand the conference over to your host, Michael Bennett, and investor relations. Please go ahead.
Speaker 2: Thank you, Justin, and good morning. I am Michael Bennett, the company's Vice President of Investor Relations, and I am happy to welcome you to our earnings presentation for the second quarter of fiscal 2023. In addition to today's audio comments, we have issued our press release and posted a set of slides.
Speaker 2: Both of which you can access on our website, exisorsteel.com.
Speaker 2: Before we start, let me draw your attention to the detailed Safe Harbor statement on Slide 2, which is also included in our press release.
Speaker 2: 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 margins.
Speaker 2: Our actual results may differ materially from those projected in our forward-looking statements.
Speaker 2: Additional information regarding factors that could cause actual results to materially differ from those in the forward-looking statement is contained in Slide 2, as well as in our press release today.
Speaker 2: Please note that we will be discussing some non-GAAP measures during our presentation today. We have included a reconciliation of those metrics to GAAP in the appendix of our slide presentation.
Speaker 2: Now, let me turn the call over to Tamara Lundgren, our Chairman and Chief Executive Officer. She will host the call today with Stefano Guigine, our Chief Financial Officer.
Speaker 3: Thank you, Michael. Good morning everyone, and welcome to our fiscal 2023 second-quarter earnings call.
Speaker 3: Before we begin with our formal presentation, I'd like to address the devastation that occurred in Turkey due to the earthquake in February and, more recently, the series of natural disasters in the US.
Speaker 3: Our news cycles are short these days, and I'd like to take a moment to remember the tens of thousands of people who lost their lives, loved ones, homes, and livelihoods as a result of these natural disasters.
Speaker 3: Our relationships in Turkey go back decades, and we have sold millions of tons of recycled metals to our valued Turkish customers over that time.
Speaker 3: Here at home, we have employees, customers, and suppliers in many of the communities impacted by tornadoes, storms, and floods.
Speaker 3: I know that I speak for all of us when I say that our thoughts and prayers continue to be with those impacted by these disasters.
Speaker 3: I'd also like to recognize our employees for their generosity and humanitarian spirit.
Speaker 3: whether providing support to Turkey or more recently providing aid and assisting and cleanup efforts connected with natural disasters and rail accidents in the US.
Speaker 3: Our company and our employees have stepped up to offer many forms of in-kind and financial support. Thank you.
Speaker 3: Today on our call, I'll review our quarterly financial results, the trends affecting our business, and the progress on the strategic activities we have underway to address evolving industry dynamics and create long-term value through the cycle.
Speaker 3: Stephano will then provide further details on our financial performance, capital structure, and capital investments.
Speaker 3: I'll wrap up, and then we'll take your questions.
Speaker 3: So let's turn now to slide four to get started.
Speaker 3: Earlier this morning, we announced the results for our fiscal 23 second quarter, which reflected an adjusted EPS of 14 cents and an adjusted EBITDA of $32 million.
Speaker 3: Our strong sequential improvement benefited from: the resolution of the shutter operating disruptions that affected our EF and Oakland operations in the first quarter, and the strengthening of both ferrous and non-ferrous prices. There was a significant sequential increase in our ferrous sales volume.
Speaker 3: 7% due to seasonality and softer demand for wire rod products.
Speaker 3: While ferrous scrap prices increased during the quarter to relatively strong levels on an historical basis.
Speaker 3: Lower industrial and consumer activity led to tighter-than-expected scrap flows, tempering our margin expansion.
Speaker 3: We generated strong free cash flow during the quarter, and our results benefited from the productivity initiatives and cost savings that we implemented earlier in the fiscal year.
Speaker 3: And we continued our uninterrupted record of returning capital to our shareholders through the issuance of our 116th consecutive quarterly dividend.
Speaker 3: Let's turn now to slide five.
Speaker 3: Ferris export prices strengthened during the quarter amid increased global global steel demand.
Speaker 3: Tight availability of scrap and strong rebar demand in Turkey.
Speaker 3: Ferrous prices increased about 35% from their November trough, with about half of that uplift occurring in February, which should benefit our Q3 shipments.
Speaker 3: Since the end of the quarter, Ferrous export prices strengthened before flattening and currently remain in the mid to high 400s per ton delivered, depending on the region.
Speaker 3: Recently, the Turkish government announced the country's need for 5 million tons of steel to support those efforts in the Iskander region.
Speaker 3: This implies a need for around 6 million tons of ferrous scrap.
Speaker 3: We expected even accounting for Turkish domestic scrap generated by earthquake cleanup activities. Turkey's scrap imports should rise materially to meet this need.
Speaker 3: In the US domestic market, ferrous prices increased each month of Q2 and in March, following seven consecutive months of price declines.
Speaker 3: Higher scrap prices were driven by mil.
Speaker 3: steel millery stocking, tighter scrap flows, and higher auto production.
Speaker 3: In the non-ferrous markets, demand and prices for recycled copper, aluminum, and zora products increased throughout most of Q2, driven by low inventories and stronger demand from China and Southeast Asia.
Speaker 3: Turning to finished steel, while demand and prices came off their near record highs, metal spreads continued to be robust during Q2. Although higher interest rates and tighter credit conditions could lead to softer demand, there are a number of offsetting trends.
Speaker 3: We expect lower steel imports into the US from Turkey due to Turkey's increased domestic demand associated with its rebuilding activities.
Speaker 3: In addition, we expect increased demand for rebar, supported by the Biden administration's infrastructure bills and the Buy Clean directive.
Speaker 3: Our own steel mill, with its range of low-carbon long products, including our net-zero carbon emission green steel product line, is well-positioned to meet this rising demand. Let's turn now to Slide six.
Speaker 3: Decarbonization is a powerful structural driver of demand for recycled metals which require less carbon to produce than mined metals.
Speaker 3: Many low carbon technologies are widely acknowledged to be more metal intensive. Maximizing the environmental benefits of decarbonization will require increasing use of recycled metals versus virgin materials.
Speaker 3: An example of one of the many actions we're taking to capture value from this rising demand is our acquisition of Scrap Source LC last quarter.
Speaker 3: ScrupSource is an asset-like business focused on providing metals recycling management services and solutions to over 500 customers including manufacturers, fabrication facilities, and service centers across North America.
Speaker 3: This lean business model will enable us to scale our national accounts platform.
Speaker 3: Enhance services to our national manufacturing and retail customers.
Speaker 3: Increased supply flows to our operations and creates expansion opportunities in new regions.
Speaker 3: The integration of ScrapSources with our national accounts platform is well underway, and we are launching our integrated recycling services activities under our trademark three PR brand.
Speaker 3: 3PR stands for third-party recycling.
Speaker 3: Three PR involves activities where SNF Serge provides recycling services, including, among other activities, scrap management and recycling solutions for our customers' reverse logistics processes.
Speaker 3: Our three PR brand reflects a rapidly growing and important service and supply chain solution.
Speaker 3: for industrial manufacturing and retail customers that enables greater recycling rates and value recovery, improved manufacturing and retail efficiency, reductions in material going to landfill, an improved carbon footprint, and enhanced sustainability reporting.
Speaker 3: So now let's turn to slide seven to review additional strategic actions we have underway.
Speaker 3: We are focused on four strategic priorities. First, technology investments in advanced metal recovery systems that are major recycling operations to enable us to extract more non-ferrous metals from our shredding activities, increase throughput and improve our margins.
Speaker 3: expand our product offerings and customer base, and reduce materials going to landfills.
Speaker 3: Second, volume growth. We're highly focused on increasing our ferrous and non-ferrous volumes through a combination of organic growth and recent acquisitions such as Scrap Stores, Encore Recycling, and Columbus Recycling. Our multi-year focus on this strategic priority has led to an annual 6% volume growth rate of over 2.5 million.
Speaker 3: And fourth, productivity initiatives that we undertake as part of our continuous improvement culture.
Speaker 3: and which are particularly important in the face of significant inflationary pressure. In Q2, we achieved nearly the full run rate of benefits from the cost reduction and productivity initiatives that we announced earlier in this fiscal year.
Speaker 3: So now let me turn it over to Stefano for a more detailed review of our financial and operating performance. So let me turn it over to Stefano for a more detailed review of our financial and operating performance.
Speaker 4: Thank you Tamara and good morning. I'll start with a review of our consolidated results and provide an update on our ferrous sales and the market dynamics.
Speaker 4: Adjusted EBITDA in the second quarter was $32 million, a significant increase from the $8 million achieved in the first quarter. Adjusted EBITDA per ferrous ton was $25.
Speaker 4: Performance benefited from higher demand and prices for recycled metals, as well as from the resumption of food operations at the average and open facilities in mid-November.
Speaker 4: Ferrous volumes increased by 48% sequentially. The expansion in metal spreads for recycled metals in the higher price environment was limited by the tightness in supply flows due to a combination of lower economic activity and winter seasonality.
Speaker 4: We experienced a compression of metal spreads on shipments contracted before the increase in market prices during the second half of the quarter.
Speaker 4: This substantially offset the benefit from average inventory accounting of approximately $8 per ferrous tonne in the quarter resulting from the increase in market prices.
Speaker 4: The contribution from our rolling mill remained a significant driver of our consolidated performance, although it decreased sequentially on lower net selling prices and volumes.
Speaker 4: Our second quarter results also included approximately $3 million in SG&A expense for various legal matters.
Speaker 4: We continue to focus on finding ways to mitigate and offset inflationary pressures we are experiencing on operating costs, including for labor, energy, logistics, and waste disposal. During our second quarter, we successfully implemented initiatives targeting a reduction of general expenses by approximately twenty percent.
Speaker 4: a targeted quarterly run rate of $5 million in the second quarter and expect to achieve the full run rate by the fourth quarter of fiscal 23.
Speaker 4: These initiatives are in addition to the $40 million in targeted annual benefits from measures we announced and implemented in the first quarter focused on production cost reductions, operating efficiencies, and yield improvements.
Speaker 4: Turning to the first dynamics in the quarter, average net selling prices were up 8% sequentially.
Speaker 4: Due to selling ahead, the realized prices on shipments made in the second quarter did not fully reflect the increase in market prices in the period.
Speaker 4: Our fair sales volumes were up 48% sequentially. This increase was driven by three factors.
Speaker 4: First, over one thousand tons are associated with the resumption of full operations in EZ and Oakland.
Speaker 4: Second, the delivery of several bulk cargo's delayed at the end of the prior quarter carrying approximately 100,000 tons.
Speaker 4: And third, a drawdown of ferrous inventories at other facilities into normal ranges to meet strengthening demand.
Speaker 4: Our top sale destinations for ferrous experts in the quarter were Vietnam, Turkey, and India.
Speaker 4: The share of export sales was 65%. Shipments to Turkey made up 17% of our total sales volumes. We did not experience disruptions to our shipments to Turkey following the earthquake in early February , and rebuilding efforts are expected to lead to more demand for recycled metal in the country.
Speaker 4: Now, let's move to slide 9 for an update on non-ferrous sales and the market dynamics.
Speaker 4: We saw a stronger demand for non-ferrous products during the quarter, including from global restocking as China's strict COVID lockdowns were lifted in the latter part of calendar 22.
Speaker 4: Together with a weaker US dollar, this results in market prices for copper, aluminum and other nonferrous products increasing during the quarter. As a result, our average net selling prices for nonferrous shipments were 10% higher sequentially.
Speaker 4: Non-Paris sales volumes were substantially flat on a sequential basis and we sold our Non-Paris products to 15 countries.
Speaker 4: with the major export destinations being Malaysia, India and China.
Speaker 4: The share of export sales of nonferrous was 54% in the second quarter, down sequentially from 60% due to increased shipments into the domestic markets of furnace-ready products recovered by our nonferrous systems.
Speaker 4: Our product mix is highly diversified, with sales of Zorba, Twitch, aluminum and copper representing approximately 80% of our non-ferrous volumes.
Speaker 4: Our investments in advanced nonferrous recovery technologies give us the ability to produce more furnace-ready materials, which creates optionality to meet changes in market demand for nonferrous products while maximizing margins. Now let's move to slide 10 to provide an update on our technology investments. We continue to advance our technology program and our investment in nonferrous recovery technologies.
Speaker 4: focused on increasing metal recovery of non-ferrous materials from shredding operations and generating more furnace-ready higher value products.
Speaker 4: In March, we began commissioning of a major copper recovery system in Massachusetts with an additional primary recovery system on the west coast targeted to do so by the end of our third quarter.
Speaker 4: We will complete our investment program with two additional major copper recovery systems targeted to begin commissioning by the end of the summer 2023, subject to construction, equipment delivery and permitting timelines.
Speaker 4: Once fully operational, we expect non-ferrous volumes to recover from shredding to increase by approximately 20%.
Speaker 4: As a reminder, the main drivers of the projected increase in recover volumes are the seven primary non-spersed recovery systems.
Speaker 4: Three of them are major aluminum and four are major copper systems. Our initiative also includes aluminum separation systems on each coast that are already operational and four supplemental copper separation systems of which one is stealing its ramp up phase.
Speaker 4: The contribution to performance from these technologies in the second quarter was positive, although not yet material to results after consideration of the costs incurred on several systems that are undergoing commissioning and ramp up activities.
Speaker 4: We expect the net benefits from these investments to gradually expand and to deliver approximately half of the targeted full run rate of benefits by the fourth quarter of fiscal 23.
Speaker 4: We continue to target substantial achievement of the estimated run rate benefits to EBITDA of $10 per ferrous ton by the end of calendar year 2023, upon completion of commissioning and ramp up for all systems. We expect the overall capital investment for these projects to be in the range of $130 million.
Speaker 4: of which approximately $125 million have been spent to date, leaving $5 million to complete the project in fiscal 23.
Speaker 4: Now, let's move to slide 11 to discuss our steel meal performance and waist-close markets.
Speaker 4: Demand for finished steel in the second quarter in our West Coast markets was lower sequentially, driven by seasonality on construction activity, including the impact of prolonged periods of rain in California.
Speaker 4: Average net selling prices for finished deals decrease 7% sequentially.
Speaker 4: Finished steel sales volumes of 109,000 tons were down 7% sequentially, but up 3% year over year. Our average mill utilization was 75%, which was higher than the U.S. average of approximately 73% for the period.
Speaker 4: While metal spreads that are milled were down from the record highs experienced during calendar 22, they remain robust, and the mill stands to benefit from the demand support to be provided by the US infrastructure bills.
Speaker 4: Now let's move to slide 12 and discuss cash flow, capital structure and our outlook for the third quarter.
Speaker 4: Operating cash flow in the second quarter was strongly positive at $88 million.
Speaker 4: driven by profitability and a benefit to working capital primarily associated with a drawdown of inventories.
Speaker 4: Year to date, we achieve positive operating cash flow of $26 million. As the chart on the top left shows, we have a multi-year track record of generating strongly positive annual operating cash flows through the cycle.
Speaker 4: CapExpend in a second quarter was 27 million dollars, down from 48 million dollars in the prior quarter.
Speaker 4: For fiscal 23 as a whole, we now project our CAPEX to be in the range of $110 million to $120 million.
Speaker 4: Slightly less than a third of the fiscal 2023 capex will be for growth projects, including the completion of our technology initiatives, with the remaining for maintaining the business and environmental related capital projects.
Speaker 4: Excluded from this annual range is CAPEX associated with repair and replacement of the Shredder enclosure building at our Everett facility during Piscot 23. As these expenditures are expected to be substantially recovered through insurance over time.
Speaker 4: Net debt decreased $55 million to $299 million at the end of the second quarter, reflecting the strong generation of free cash flow.
Speaker 4: Availability under our Crate Facility remains sizable, with a borrowing capacity of $800 million and a maturity of August 2027.
Speaker 4: Net leverage was 24% at quarter end, down from 28% sequentially. And the ratio of net debt to adjusted EBDA was 1.5 Hikes.
Speaker 4: We returned capital to shareholders through our quarterly dividend. While we did not repurchase shares in the second quarter, buybacks remained part of our balanced capital allocation strategy, and we repurchased approximately 2.7% of our outstanding stock in the last 12 months.
Speaker 4: Our effective tax rate on adjusted second quarter results was 14%, lower than expected due to the beneficial impact of certain tax items.
Speaker 4: Although there are still almost two months left in the quarter, I'll now turn to our outlook for the third quarter of fiscal 23, which is based on market condition and information we have today.
Speaker 4: Taking into account that Ferrous volumes were up nearly 50% in the second quarter as they benefited from an inventory drawdown effect from delayed cargos.
Speaker 4: We expect our ferrous volumes for the third quarter to be down approximately 10% from that strong level, supported by spring seasonality.
Speaker 4: Nonferrous sales volumes are expected to be up 15% sequentially. Finish steel sales volumes are expected to be up 25% sequentially due to seasonally higher construction demand.
Speaker 4: We expect our contrary data-adjusted EBDA per ferris ton to significantly improve from the second quarter and approximate $45.
Speaker 4: Looking at some of the underlying dynamics, there are various factors contributing to the expected improvement in sequential performance.
Speaker 4: dynamics, there are various factors contributing to the expected improvement in sequential performance. First,
Speaker 4: metal spreads for ferrous and non-ferrous recycle metal are anticipated to expand as our contracted shipments for delivery in the third quarter fully reflect the increase in market prices that occurred earlier in the calendar year. However, this expansion in spreads continues to be constrained by tightness in scrap flows.
Speaker 4: Second, we expect a higher sequential contribution from our steel mill driven primarily by higher sales volumes. Third, retail part sales at our pick and pull auto stores are expected to increase due to seasonality.
Speaker 4: We expect our effective tax rate in the third quarter to approximate 27% and to be in the range of 25% for the full fiscal year, subject to company performance. We expect the average inventory accounting effect to be neutral.
Speaker 4: And lastly, we anticipate interest expense to be slightly more than the previous quarter due to the increase in short term interest rates.
Speaker 4: and are operating cash flow in the third quarter to be positive based on higher profitability.
Speaker 3: And with that, I'll turn the call back over to Tamara. Thank you, Stefano. As I often say, sustainability is at the core of what we do and how we operate and has been since our founding in 1906. Since our last earnings call.
Speaker 3: We've been recognized by several well-respected organizations for various aspects of our sustainability program. Corporate nights ranked as number one on their global 100 list of the world's most sustainable companies, highlighting the increasingly critical role of our work in the global transition to a low-carbon future.
Speaker 3: An ethosphere named us one of the world's most ethical companies for the ninth consecutive year.
Speaker 3: Our multi-year people, planet, and profit goals underpin our sustainability framework. I encourage you to visit our website to view our latest sustainability report, which describes our goals in more detail.
Speaker 3: Now, let's conclude by turning to slide 14.
Speaker 3: As we hit the halfway point in Fiscal 23, our strategic growth investments and our productivity and cost reduction initiatives are expected to deliver additional benefits in this fiscal year and beyond.
Speaker 3: We have a strong balance sheet, a track record of delivering positive operating cash flow, an ability to invest in the growth and productivity of our company, and an uninterrupted record of returning capital to our shareholders through our dividends.
Speaker 3: We are well positioned to benefit from the global focus on decarbonization, the increased metal intensity of low carbon technologies, and the continued growth in U.S. and global EAF steelmaking capacity.
Speaker 3: Before closing, I'd like to congratulate our employees for their excellent safety performance in the first half of the year. While we still have work to do to keep achieving improvement in our safety performance, our team's commitment to safety continues to be reflected in our results.
Speaker 3: Thank you for your dedication to working safely while continuously serving our customers and communities, supporting our suppliers, and demonstrating the critical and essential role of our business and industry in the economy.
Speaker 3: You've demonstrated once again why we have continued to be a leader in the recycling industry for over a century.
Speaker 1: And now, operator, let's open the call for questions. And thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And one moment for our first question..
Speaker 5: open. Good morning Tamara and Stefano and thank you for the time this morning. My first question is just around the metal spread outlook that you've been outlining that certainly seems like average selling prices have moved in the right direction but to your point are there any real-time impacts that you're seeing to scrap flows as it relates to the changes in industrial and...
Speaker 3: and thanks for your questions. So although broadly speaking scrap remains tight and US manufacturing is near a three-year low, there are nascent signs of improved inbound flows that are primarily related to seasonality.
Speaker 3: And I think that the outlook of that increasing supply flows aligns with the higher margins that Stefano was referring to in his outlook, in his prepared remarks.
Speaker 5: Okay, understood. So real time following the regional banking crisis, there's not been enough impact to industrial order book activity that's necessarily causing concern for you guys at this point.
Speaker 3: So we haven't seen any impacts from the banking situation. Clearly, credit contraction could impact the demand for finished steel, but there are offsetting trends. We do anticipate lower imports into the US. We do anticipate funding provided for the next few months.
Speaker 3: Through the Biden administration's infrastructure bills, and then just generally and longer term, the higher metal intensity associated with low carbon technologies and the clean tech re industrialization are all long term trends that are supporting demand. Understood, that's very helpful.
Speaker 5: My second question is shifting gears a little bit. Just on the advanced metals recycling, so it looks like we've made some good progress to getting most of the construction complete before the end of the summer, but can you remind us what are the remaining construction, equipment delivery, or permitting pieces that remain outstanding before getting to the end of the summer?
Speaker 4: the major coppericol resistance in Massachusetts in March and we expect to have another one coming online toward the end of our third quarter. They will leave only two additional major coppericol resistance that are targeted to begin commissioning at the end of the summer. And with that...
Speaker 4: we would have completed the construction. Obviously, as you mentioned, this timeline is subject to equipment delivery. At this point, we don't expect any issues. The supply kind of constraints are more subdued.
Speaker 4: There is one system that is still subject to permitting. At this point, this is our target at an expected timeline. And as I mentioned during the call, based on that timeline, with an expect to be able to achieve the full run rate benefits from those systems, one, one, they're fully operational by the end.
Speaker 4: of the current calendar year and that remains unchanged compared to the past. Right, thank you, Stefana. And thank you.
Speaker 1: And I am showing no further questions. I would now like to turn the call back over to Tamara Lundgren. You're now available.
Speaker 3: Thank you, operator, and thank you for your time today, everyone. I look forward to speaking with you again in June when we report our third quarter results. In the interim, stay safe and stay well.
Speaker 6: This concludes today's conference call. Thank you for participating. You may disconnect.
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Speaker 7: Thanks for watching!