Q2 2024 Radius Recycling Inc Earnings Call
As 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.
Tamara L. Lundgren: She will host the call today with Stefano, Virginia, our Chief Financial Officer.
Tamara L. Lundgren: Thank you Michael Good morning, everyone and welcome to our fiscal 'twenty four second quarter earnings call.
Tamara L. Lundgren: On our call. This morning, I'll review, our Q2 results and the market conditions impacting our performance Stefan I will then provide more detail on our financial performance and our capital investments and allocation priorities I'll wrap up with an update on the strategic actions, we have underway to address current industry dynamics.
Stefan: And create long term value through the cycle and then we'll take your questions lets turn now to slide four to review our second quarter highlights.
Stefan: Without question current conditions in the scrap markets remain challenging the cyclical headwinds of high interest rates and low manufacturing activity are creating tighter supply flows and compressing our metal spreads and they are being exacerbated by continued inflationary pressures.
Stefan: Our Q2 results reflected adjusted EBITDA of $3 million and an adjusted EPS loss of $1 four.
Stefan: While our second quarter volumes are always impacted by seasonality. This year, they were particularly affected by unusually wet winter weather. However, on a year over year basis, our nonferrous volumes increased in Q2 due in part to contributions from our strategic investments in advanced metal recovery technologies.
Stefan: The tough impacts of cyclicality are not new to us what is different. This time are the structural demand tailwind, which are strongly aligned with our strategic initiatives focused on metal recovery technologies volume growth expansion of our three PR services and mitigating the impact.
Stefan: If current market conditions through actions that are within our control specifically cost reductions operating efficiencies and execution.
Stefan: During the second quarter, we achieved substantially the full quarterly run rate associated with the $30 million productivity plan that we announced last October we expanded this plan by an additional $40 million throw a 10% reduction of SG&A expense and further production cost efficiencies.
Stefan: These initiatives included workforce changes, which have a profound impact not only on our colleagues who are no longer with our company, but also on the radius team.
Our team has shown tremendous resilience and managing through this challenging time and I want to thank them for their commitment and nimbleness and executing these changes while continuing to work safely and support each other.
Stefan: Let's turn now to slide five to review market trends.
Stefan: Scrap supply flows remained tight during the quarter on lower economic activity.
Stefan: For the last 16 months U S manufacturing PMI has been clocking in at below 50.
Stefan: The longest stretch of contraction in manufacturing activity that we've seen in over 20 years.
Stefan: The most recent March report, however shows demand might be bouncing back with the index rising to slightly above 50 up two and a half percentage points from February which may mark the beginning of our manufacturing recovery.
Stefan: Another indicator of scrap tightness is the average age of vehicles on the road driven.
Stefan: Driven by higher prices for used cars, lower auto production and higher financing costs the.
Stefan: The continued increase in average age of vehicles on the road has resulted in lower scrappage rates at the end of life vehicles.
Stefan: Other contributors to the constrained scrap supply include the relatively low demand for durable goods and increased scrap collection costs, including the impacts of inflation.
All of these tight supply conditions have led to a stickiness and scrap purchase costs, which have not moved in line with the changes in selling prices.
Stefan: Now as you can see on this slide ferrous export selling prices strengthen in the early part of the quarter driven primarily by restocking globally before softening in the second half of the quarter Scott.
Stefan: Scrap prices in the U S domestic ferrous market or higher than export prices throughout the quarter and followed a similar trajectory.
Stefan: Since the end of the quarter March ferrous export and domestic prices eight typically weaken further.
Preliminary April reports indicate a stabilizing domestic market.
Stefan: And a slightly improving export market.
Stefan: Turning to nonferrous base metal index prices for aluminum and copper remained range bound during the quarter impacted by a variety of factors, including a softer U S dollar supply tightness and weaker demand out of China.
Turning to finished steel.
Stefan: Prices in the quarter remained relatively steady.
Stefan: Although the unusually wet weather on the west coast during the quarter impacted construction activity beyond normal seasonality.
We expect to see this correct itself over the next few months along with increased demand related to the U S infrastructure bills.
Stefan: Our Oregon steel mill with its range of low carbon products, including our line of net zero carbon emissions steel products is very well positioned to benefit from these market movements.
So now let me turn it over to Stefano.
Stefano: Thank you Deborah and good morning.
Stefano: Starting with the ferrous market dynamics in the fourth or.
Stefano: Average selling prices for ferrous improved sequentially by 8% driven by the strengthening we saw in the early part of the corporate it from restocking. However, the benefits of increased selling prices was mostly offset by a higher scrub purchase right.
Stefano: Tighter supply flows conditions continued to constrain our ability to expand spread more meaningfully.
Compared to our early January expectation second quarter performance was also impacted by the decline in ferrous export prices during January and February which was due in part to elevated levels of Chinese exports in.
Stefano: In the first two months of calendar year 'twenty 'twenty four China finished steel exports increased 33% year over year impacting both the steel production and ferrous scrap demand in Asia, the middle East and Turkey.
Stefano: Ferrous sales volumes were down 15% sequentially as they reflected the constrained supply flows including from winter seasonality and all of the delays in certain bulk shipment at the end of the quarter.
Stefano: Our second quarter results included a modest positive impact from average inventory accounting of $2 per foot is down and the higher ferrous price environment, which compared to $1 million detriment in the first quarter.
Stefano: We also recognized $2 million in insurance recoveries related to the shredder outage at our <unk> facility that occurred in prior years, which compares to $4 million recognized in the first quarter.
Stefano: The share of domestic better shipment was 49% slightly higher than usual.
Stefano: Export shipment delays.
Stefano: Our top sales destinations for better exports, where Bangladesh, Turkey and Peru.
None: Now, let's move to slide seven to discuss nonferrous sales and the market dynamics and provide an update on our nonferrous investment.
None: Nonferrous sales volumes were up 7% year over year, reflecting benefits of our nonferrous recovery investment and expansion of our platform.
None: We were down 3% sequentially on seasonality.
We sold our nonferrous products to 13 countries with the major export destinations being India, Malaysia, Thailand and China.
None: Average net selling prices for copper aluminum and other nonferrous products were up 3% sequentially on steady global demand and softer U S. Dollar however.
None: However, the prices of PGM metals continues to be impacted by subdued demand from U S and global auto producers and were down 7% sequentially and around 50% from a year ago.
None: We continue to progress our investment in primary nonferrous recovery systems, which drive the incremental metal recovery and the majority of the expected contribution from our program.
None: Several of these primary systems are in various stages of commissioning and ramp up with two left to start construction on the west coast of which one awaiting permitting approval.
None: We work closely with our technology vendors to complete fabrication and installation.
None: And continue to project completion of construction of the currently permitted primarily system by the end of the summer we'd ramp up to full operations to be reached by calendar year end 2024.
None: We also have already operational advance separation systems that give us the option to process the mixed aluminum metal zorba into higher grade Twitch and other furnace ready materials when market dynamics are supportive.
None: Overall the contribution to performance from these systems was positive in the second quarter.
None: Once fully operational we continue to expect substantial returns from our investments in these technologies of approximately $10 EBITDA or third stone.
None: Now, let's move to slide eight to discuss our steel mill performance.
None: Our finished steel products remains a significant contributor to our consolidated performance in the second quarter, although down sequentially on construction seasonality.
None: Finished steel sales volumes of 114000 tons were up 5% year over year, and rolling mill utilization of 81% remained well above prior year levels of 75%. Both a reflection of continued healthy demand from non residential construction you know western U S markets.
None: Sequentially sales volumes were down 11% due to seasonally lower construction demand, including from unusually prolonged periods of rain on the west coast, particularly in California.
None: Average net selling prices for finished steel were flat sequentially.
None: We believe our mill stands to benefit from the expected demand created by the U S infrastructure Bill.
None: Now, let's move to slide nine.
None: Operating cash outflow for the second quarter was $55 million, reflecting a detriment from networking capital primarily due to the timing of shipment and collection, including the impact of bulk shipments delayed at the end of the quarter. We expect these working capital items to reverse and benefit operator.
None: Cash flow generation in the third quarter.
None: Capital expenditures were $15 million during the second quarter.
None: We have lowered the projected capital expenditures for fiscal 'twenty, four as a whole, which we now expect to be around $80 million compared to $100 million previously.
None: Approximately one fourth would be for growth projects, including the completion of our nonferrous technology initiatives and investments to support recycling services expansion with the remaining spend for maintaining the business and environmental related capital projects.
None: Net debt was $360 million at the end of the second quarter, including the impact from the networking capital detriment due to the timing of shipments at quarter end.
None: Availability under our credit facility remains sizable with a borrowing capacity of $800 million and a maturity of August 2027.
None: Net leverage was 30% at quarter end.
None: We also returned capital to shareholders through our quarterly dividend.
None: The effective tax rate for the second quarter was unusual reflecting an expense of approximately 4% on a reported pre tax results and 8% on adjusted non-GAAP results.
None: Lower tax rate was driven primarily by the impact of changes in projected company performance compounded by the recognition of a valuation allowance charge of $2 million on deferred tax assets in one of the company's tax jurisdictions.
None: Now, let's move to slide 10 to review our productivity improvement program.
None: We continue to focus on ways to mitigate the current market conditions and inflationary headwinds and operating margin pressure through things that are in our control.
None: Looking at some of the specifics regarding the new $40 million or a program.
None: A primary component is from adjustments in headcount and other employee related expenses, especially focused on SG&A type activities.
None: We're also decreasing a sizeable amount of non trade procurement spend increasing productivity in transportation and logistics and further reducing certain discretionary activities such as travel use of professional services and other outside services.
None: Approximately half of the targeted quarterly run rate benefits from these new initiatives is expected to be achieved in the third quarter with substantially all of the remainder by the end of the fiscal year.
We expect to incur restructuring charges and other exit related costs of approximately $6 million in connection with these measures of which $3 million were incurred during the second quarter.
None: Given we are still early in the quarter, we plan to provide a third quarter quantitative outlook at a later time when trends of volumes and spreads and the impact of seasonality on both scrap flows and construction activity become more visible.
None: And with that I'll turn the call back over to Tamara.
Tamara L. Lundgren: Thank you Stefano.
Tamara L. Lundgren: De carbonization is driving increased demand for recycled metals.
Tamara L. Lundgren: Many low carbon technologies are more metal intensive than the technologies, they are replacing and recycled metals require less carbon to produce in mind metals.
Tamara L. Lundgren: The anticipated structural deficits for metals, such as copper and nickel.
Tamara L. Lundgren: Increased use of recycled metals by manufacturers seeking to reduce their environmental impact are also driving demand for our products and services and additionally, they use a ferrous scrap in the steelmaking process that process is also expected to continue to grow significantly in the coming years and E F still.
[noise], making capacity, which uses ferrous scrap as its primary raw materials has been expanding and is projected to increase further.
Tamara L. Lundgren: While we do not control the pace of improvement in market conditions, we have seen in the past how quickly the cycle can turn.
Tamara L. Lundgren: We accept we expect scrap supply flows to benefit from a decline in U S interest rates and a recovery in global manufacturing activity, including auto production.
Tamara L. Lundgren: And to provide us with significant operating leverage benefits.
Tamara L. Lundgren: Over the last 36 months a period characterized by both historical margin highs and lows.
Tamara L. Lundgren: Our adjusted EBITDA averaged approximately $45 per ferrous ton.
Tamara L. Lundgren: We believe that the completion of our investments in advanced Nonferrous recovery technologies should be additive to our recent historical average and together with our cost reduction and productivity plans should result in meaningful contributions to our margins independent of the timing of a market recovery.
Tamara L. Lundgren: Today's market conditions won't last forever with our over 100 operating facilities, our low carbon and net zero carbon emission Green finished steel products, our three P. R service and supply chain platform.
And the cost reduction and productivity programs and strategic investments we have underway we.
Tamara L. Lundgren: We are well positioned to benefit as U S interest rates decline.
Tamara L. Lundgren: Global manufacturing activity recovers infrastructure investment takes off and the transition to low carbon technologies continues.
None: Before we open the call for questions I'd like to thank our employees again for their dedication to continuously servicing our customers and communities supporting our suppliers and demonstrating the critical and essential role of our business and industry in the global economy and now operator, let's take some questions.
None: Thank you at this time, we will conduct a question and answer session.
A reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please stand by while we compile the Q&A roster.
None: Our first question comes from the line of Martin Englert of Seaport Research Partners. Your line is now open.
Martin John Englert: Well good morning, everyone.
Martin John Englert: Morning morning.
Martin John Englert: First question. The company has introduced a total of 70 million.
Martin John Englert: Great adoption.
Martin John Englert: Most recently the $40 million leg.
Martin John Englert: If the recent market fundamental trends.
Martin John Englert: You feel there is room for additional reductions on top of this.
Martin John Englert: Over the next 12 months or so.
None: So let me start I'm, Martin and Stefano and plays out in as you as you see fit.
None: The program that we've just implemented a $40 million has benefits that have yet to be seen in our results about half of them are expected in Q3.
None: With substantially all by the end of the calendar year, and these measures and Stefano indicated or a combination of cost reduction and productivity efficiencies operating efficiencies. We have a successful history of adjusting our platform appropriately as market conditions require and that's a reflection of the nimbleness and the.
None: You can see of both our team and our platform.
None: Yeah.
None: Okay. Thank you for that.
Since exiting February quarter can you discuss any changes that you see in ferrous recycling right.
Scrap flows that you may have said Sir sure.
None: Sure.
None: So as I mentioned in our prepared remarks since the end of the quarter, we saw prices in both the export and the domestic market in March a typically weak and you know typically in the in the beginning of spring. We you know we start to see a rebound in in inflows and the like.
None: We didn't see that in March part of that is due to weather and and as I also mentioned the manufacturing activity has been in a 16 month contraction with just March beginning to show some improvement, but the preliminary April reports I mean, we're only four days into April are indicating a stabilizing domestic market and.
None: They are slightly improving export market.
None: [noise] Sullivan.
None: Alright.
Sullivan: A little bit.
Sullivan: Weeks.
Sullivan: What are you seeing as far as volume activity or demand activity.
Sullivan: On the export front.
Sullivan: Since exiting the quarter.
None: Well I I think what we're saying is a what I would say in the context of current activity.
None: No more steady buying them off the east coast, Oh steady selling off the east coast and to you know into Turkey in that region I'm, a little still a little weak I'm on the west coast and both markets are being impacted by this recent a elevated level.
None: Of of Chinese exports, and and so you know I I I do see that as as impacting some of the export demand.
None: Okay.
None: On the recent quarter your inventory holding gains were $2 per tonne.
None: Uh huh.
None: Anything that you anticipate for three Q.
None: Or if.
None: You're uncertain about it maybe another way to approach it would be okay.
None: Got it.
None: Where they're at today quarter on quarter.
None: And any anticipated change in holding gains or losses.
None: Yes, Farhan. This is Stefan I'll, obviously, you know we are not providing quantitative guidance for third quarter, but mechanically.
Stefan: Mentoring holding gains and losses on what we call the average inventory accounting effect.
Stefan: Effect is positive in a rising market environment as we saw in Q2 and and detrimental when prices decline.
Stefan: Okay.
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None: Okay.
None: Yeah.
None: Okay.
None: Late in March.
None: It would translate into a holding loss potentially.
None: That's correct mechanically coming from from prices they were higher in February if they're lower for the for the new quarter mechanically that's how it would work and Martin.
None: Probably based on what it is right now it wouldn't be a material amount, but it would make economically be.
None: Directionally, a detriment to the quarter correct.
None: And there were two reasons for Ben I wanted to touch on Baltimore groups cloud growth.
Quake in Taiwan.
None: Please touch on.
If there are any implications for the company I understand you don't have a footprint.
None: More alright.
None: Alright.
None: East Coast exports.
None: The impact of logistics.
None: And there is a scrap export it out of there.
I'm curious.
What your thoughts are on those two items.
None: And both of those events are tragic and obviously our thoughts are with all of US who were impacted for the impact on the company. Neither we don't expect an impact either in connection with the with the Baltimore situation or in connection with Taiwan, I think any rebuilding or the rebuilding.
None: That that is necessary in Taiwan, it's likely going to be met by by their own domestic ER capacity.
None: Okay.
None: Anything as far as.
None: Thinking about scrap demand are going into Taiwan or that area.
None: Implications there really.
Not for Us I I really don't I don't see that they're primarily a container a purchaser and and so as I said I think that the.
None: Rebuilding required they could meet internally with their with their own capacity.
None: Okay. That's all I have I appreciate it.
None: Really good job navigating this difficult market, especially on the west coast, they're looking at the broader trend.
None: Lot more challenging.
None: While the company put up for results.
None: Well. Thank you very much for that Martin and you know us as as we talk about in the you know the company regularly is you know our job is to keep what they say one eye on the microscope in terms of managing our costs and inefficiencies, but we take a lot of comfort with the one eye on.
None: The telescope, which really which really sees a you know very very positive structural tailwind driven by a F production growth in the carb trends and and the metal in terms of city of low carbon technologies and we just feel that we're very well positioned to take advantage of that the cyclical headwinds of low.
None: Manufacturing activity and and you know these higher for longer interest rates will turn and with all the work that the team is doing and the flexibility of our platform I really believe we can be well positioned to benefit from all of that and the infrastructure investment funds that are going to come through ultimately from out from that legislation.
None: So thank you.
None: Thank you.
Yeah.
None: Okay.
None: Thank you. This concludes the question and answer session I would now like to turn it back to Tamara Lundgren for closing remarks.
Tamara L. Lundgren: Thank you and thank you everyone for your time today, we look forward to speaking with you again, when we report our third quarter results in the interim stay safe and stay well.
None: Thank you for your participation in today's conference. This concludes the program you may now disconnect.
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