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spk03: Good day and thank you for standing by. Welcome to the Radius Recycling's third quarter 2024 earnings release call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Bennett, Investor Relations. Please go ahead.
spk04: Thank you, Danielle, and good morning. I'm Michael Bennett, the company's Vice President of Investor Relations. I'm happy to welcome you to Radius Recycling's earnings presentation for the third quarter of fiscal 2024. In addition to today's audio comments, we've issued our press release and posted a set of slides both of which you can access on our website at radiusrecycling.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 margins. 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 10Q. 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 Stefano Guggini, our Chief Financial Officer.
spk00: Thank you, Michael, and good morning, everyone. Welcome to Radius Recycling's third quarter earnings call. I'd like to start off this morning by recognizing our employees for continuing to improve our safety performance. While we continue to work towards our goal of an injury-free workplace, our year over year safety results are trending positively. Earlier this morning, we reported our financial results for our third quarter, which reflected what many of you already knew, that market conditions over the past year have been the toughest we've experienced since 2015. While our reported third quarter loss was $6.97 per share, $6.21 of this was related to a non-cash goodwill impairment charge and a related deferred tax valuation allowance. Our adjusted loss per share of 59 cents represents significantly better results than the prior quarter. And in light of the very strong headwinds in the recycled metals market, I want to recognize our team for delivering improved sequential results. Their actions show that we're not just waiting for the markets to improve, but are continuously focused on the things that we can control, lowering our costs, operating efficiently, meeting our customers' needs, and achieving the returns from our capital investments. Our concentrated focus on cost savings, productivity, technology investments, and recycling services is moving us forward. The benefits from all these initiatives should come through more clearly when the cyclical headwinds impacting scrap supply flows subside. On our call this morning, I'll review our Q3 results, the market conditions impacting our performance, and the strategic actions we have underway to address current industry dynamics and create long-term value through the cycle. Stefano will then provide more detail on our financial performance and our capital investments and allocation priorities. I'll wrap up, and then we'll take your questions. Let's turn now to slide four to review our third quarter highlights. Our Q3 results reflect sequential improvements in our major metrics. Adjusted EBITDA of $9 million was up significantly versus Q2, and we delivered meaningful increases in Ferris, non-Ferris, and finished steel sales volumes. These improvements reflect benefits from our expanded cost reduction and productivity improvement programs, continued focus on our commercial buying programs, and the strength of our steel mill, which enjoyed 88 percent capacity utilization, significantly higher than the 77 percent U.S. average. These positive achievements were partially offset by continued tight scrap supply flows that are the main contributor to our compressed margins. Amidst these challenging conditions, we generated approximately break-even cash flow and returned capital to our shareholders through our 121st consecutive quarterly dividend. Let's turn now to slide five to dig a bit deeper into the supply trends that have been impacting our performance. Lower economic activity has been constraining scrap supply flows for more than a year. For 18 out of the last 19 months, U.S. manufacturing PMI has been below 50, which indicates contractionary territory. Lower auto production, as well as higher prices and financing costs for new and used cars, have contributed to the average age of vehicles reaching their highest level on record, resulting in lower scrappage rates of end-of-life vehicles. These tight supply conditions have led to stickiness in scrap purchase costs which have not moved in line with the drops in selling prices. While we don't control the pace of improvement in market conditions, we've seen in the past how quickly the cycle can turn. We expect scrap supply flows to benefit from a recovery in global manufacturing activity, including auto production, increased infrastructure activity, and a decline in interest rates, and to provide us with significant operating leverage benefits as volumes recover. It's also important to note the big difference in the current market environment versus previous down cycles. Specifically, the structural demand tailwinds associated with decarbonization and related low-carbon technologies. This positive structural demand has led to sales prices for recycled ferrous holding up well compared to prior downturns, and for recycled non-ferrous reaching multi-year highs. Equally as important, this structural demand is strongly aligned with our strategic initiatives focused on metal recovery technologies, expanding our 3PR service and solutions business, and increasing our volumes. So let's turn now to slide six for some additional details on these strategic initiatives. As you can see on this slide, our strategic priorities can be bucketed into four areas. First, our cost reduction and productivity program. This year, we launched a program to deliver $70 million in benefits through cost reductions and productivity initiatives. In Q3, we achieved approximately 75% of the quarterly run rate associated with the plan, and we expect to deliver substantially all of the remainder by the end of our fourth quarter. Second, our investments in advanced metal recovery technologies. This is a multi-site, multi-year investment program focused on increasing the recovery of non-ferrous metals from our shredding process and creating product optionality by enabling us to create furnace-ready products based on demand and price. The majority of the returns from these investments are still to come, and when we reach full deployment, these investments should return over $40 million in annual EBITDA. Third, our trademarked 3PR service and solutions business line that enables our customers to increase their recycling rates, reduce material going to landfills, lower their carbon footprint, and provide enhanced sustainability reporting. This is asset light, typically with multi-year contracts that can provide a counterbalance to our more cyclical core recycling operations. Reflecting steady growth, our 3PR business line is now contributing just over 10% to our recycled metals volumes. And fourth, increasing our volumes. We have available retained annual recycling capacity of over 1 million fares tons compared to our current volume trends. As market conditions improve, this gives us the opportunity to create significant operating leverage. We're also investing in digital tools at our pick and pull franchise. to capture previously untapped sources of car flows and related revenue streams, which are especially important as new auto production remains below pre-pandemic levels and demand for salvaged auto parts remains solid. While benefits from these initiatives are already contributing to our financial performance, their positive effect on our operating margins is currently being masked by the impact of the headwinds we've been experiencing. As these cyclical conditions abate, we expect the benefits of our actions to become much more visible in our margins and EBITDA and to provide a substantial boost to future financial results. Let's turn now to slide seven to review Ferris and non-Ferris demand in a bit more detail. During the third quarter, market conditions for non-ferrous and ferrous recycled metals reflected diverging trends. For non-ferrous, we saw strengthening demand, with copper and aluminum achieving multi-year highs. Although lower demand from the auto industry continues to keep PGM prices down and Zorba and Twitch pricing near parity, we achieved a 10% sequential increase in average net selling prices for our non-ferrous products and 4% higher volumes. For ferrous, demand was softer sequentially, which led to a decline in average selling prices and a compression in metal spreads. This lower global demand for ferrous was due in part to increasing levels of Chinese semi-finished and finished steel exports. Seasonality, together with sales of certain cargoes that were delayed at the end of the prior quarter, lifted our ferrous sales volumes. and finished sales volumes and utilization during the quarter at our steel mill were higher sequentially, driven by seasonally stronger construction activity in the Western US and Western Canada. So now let me turn the presentation over to Stefano.
spk01: Thank you, Tamara, and good morning. I'll start with a review of the performance drivers in the third quarter, and we'll then cover progress on our cost reduction and productivity plan. Consolidated adjusted EBITDA in the third quarter improved to $9 million compared to $3 million in the prior quarter, driven by higher sales volumes, stronger non-ferrous demand, our cost reduction and productivity program, and recognition of insurance recoveries. These benefits more than offset the impact of the weaker ferrous market conditions. In the third quarter, as part of an impairment test required by accounting standards, We recognized a non-cash impairment charge of $216 million on goodwill allocated to three reporting units within our recycling operations. The impairment charge was triggered by the combination of the lower current financial performance of our recycling operations due to the challenging market conditions, including tight scrap generation and compressed metal spreads, coupled with the decrease in our market capitalization. The value of goodwill associated with our growing recycling services business remains supported. The non-cash goodwill impairment charge is adjusted out of our non-GAAP financial measures. In the third quarter, we also reached final settlement with insurers for our claim related to the shredder outage at our Everett facility that occurred in prior years. As a result, we recognized a final $7 million in insurance recoveries in the period. compared to $2 million in the second quarter. Our claim for this matter is now completed. As shown on the slide, cost savings and productivity measures are critical levers within our control to mitigate the current market conditions, inflationary headwinds, and operating margin pressure. We are focusing upon structural initiatives capable of generating sustained benefits independent of changes in market conditions or volumes. During the current fiscal year, we identified initiatives with annual run rate benefits aggregating to $70 million, including a reduction of SG&A expense by 10%. These initiatives are primarily comprised of production cost reductions, yield increases, optimization of transportation and logistics, decreases in non-trade procurement spend, adjustments in headcount and other employee-related expenses, and a reduction in discretionary activities such as travel and use of professional and other outside services. In the third quarter, we made significant progress with our plan and achieved approximately $13 million of benefits, an increase of $5 million sequentially. We expect to achieve substantially the full run rate by the end of our fiscal year. We incur restructuring charges and other exit-related costs of approximately $3 million in connection with these measures during the third quarter. Now let's move to slide nine to discuss ferrous sales and the market dynamics. Export and domestic demand for ferrous recycled metals was softer sequentially. As Tamara mentioned, the surge in Chinese steel exports continued to negatively impact global demand. In the first five months of calendar year 2024, China's finished steel exports increased 23% year over year, impacting both steel production and federal scrap demand, particularly in Asia and the Middle East. Domestic scrap prices started the quarter higher than export, but then declined more significantly during the quarter. As a result of these dynamics, average net selling prices declined 9% sequentially and led to compression in metal spreads The decline in ferrous prices in the quarter also created a detriment from average inventory accounting of $3 per ferrous ton in the third quarter. Ferrous sales volumes were up 13% sequentially, and the share of domestic ferrous shipments was 48%. Our top sales destinations for ferrous exports were Bangladesh, Turkey, and India. Now let's move to slide 10 to discuss non-ferrous sales and the market dynamics. and provide an update on our non-ferrous investments. Average net selling prices for recycled copper, aluminum, and other non-ferrous products were up 10% sequentially, reflecting a strengthening global demand throughout the quarter. Non-ferrous sales volumes were up 4% sequentially. We sold our non-ferrous products to 14 countries with the major export destinations being Malaysia, India, and China. We continue the deployment of our advanced primary non-ferrous recovery systems, which drive the incremental metal recovery and the majority of the expected contribution from our investments in advanced recovery technologies. We made headway in the ramp up activities on several of these primary systems during the quarter. We continue to work closely with our technology vendors and project completion of construction of the currently permitted primary systems by the end of the summer, would ramp up to full operations to be reached by calendar year end 2024. We have two primary systems left to start construction on the West Coast subject to permitting approval. We also have operational advanced separation systems that give us the option to process Zorba into a higher grade Twitch and other furnace ready materials when market dynamics are supportive. Overall, the contribution to performance from these systems was positive in the third quarter. We believe we are at an inflection point in the ramp-up phase of several of these systems and expect to see a trend of increasing returns from these investments in the remainder of calendar 2024. Once fully operational, we continue to expect substantial returns from our investments of approximately $10 EBITDA per ferrous ton. Now let's move to slide 11 to discuss our steel mill performance. Finnish steel sales volumes of 126,000 tons in the third quarter were up 11% sequentially, as we benefited from a solid pickup in seasonal construction activity after a slow start in early spring due to the lingering impact of rain in the west. Average mill utilization was 88%, up from 81% in the prior quarter, a reflection of sound demand from non-residential construction in our western markets. Average net selling prices for finished steel were approximately flat sequentially. We believe our mill stands to benefit from the anticipated demand associated with the U.S. infrastructure bills. Now let's move to slide 12. Operating cash flow for the third quarter was near break-even, reflecting a significant improvement sequentially. The impact on working capital of higher volumes in the quarter substantially offset the benefit from shipment and collection of certain bulk cargoes that had been delayed at the end of the prior quarter. Based on current levels of sales activity and demand, we expect the fourth quarter cash flow from operations to be positive. Capital expenditures were $16 million during the third quarter. We project capital expenditures for fiscal 24 as a whole to be in the range of $75 to $80 million. Approximately one-fourth will be for growth projects, including for our non-ferrous technology initiatives and investments to support recycling services expansion, with the remaining spend for maintaining the business and environmental-related capital projects. The effective tax rate for the third quarter was a benefit of 18% on reported pre-tax results. Our tax rate in the quarter reflected a detriment directly related to the goodwill impairment charge, as it led to the recognition of a valuation allowance charge of $6 million on deferred tax assets. Excluding the impairment charge and its related tax impact, the tax rate on our non-GAAP results was a benefit of 27% in the third quarter. Net debt was $386 million at the end of the third quarter, and net leverage was 37%. Subsequent to the end of the quarter, we amended our existing revolving credit facility which has a borrowing capacity of up to $800 million and matures in August 2027. The amendment provides for a relaxation of certain financial covenants for the four fiscal quarter end periods to the end of the second quarter of fiscal 2025. The size of the credit facility and its maturity date will not change as a result of the amendment. Our capital priorities are focused on reinvesting in the business and supporting our strategic initiatives, including completing the deployment of our technology investments and growing our recycling services business. Returning capital to shareholders through our quarterly dividend also is an important part of our balanced capital allocation. Given the quarter has just started, it is too early to provide a fourth quarter quantitative outlook at this time. And with that, I'll turn the call back over to Tamara.
spk00: Thank you, Stefano. Today's market conditions won't last forever, and as we've discussed earlier, we are well positioned to benefit from demand trends associated with decarbonization, infrastructure investment, stronger global manufacturing activity, and declines in interest rates. We have more than 100 operating facilities producing annual fares volumes of over 4 million tons, non-fares volumes of over 700 million pounds, and more than 500,000 tons of low carbon and net zero carbon emission green finished steel products. There is a legacy at our company of facing challenges head on and navigating through the toughest of times. Our team is experienced in managing what we can control in the short term while continuing to execute on our longer term initiatives. Before we open the call for questions, I'd like to thank our team for their dedication, and our customers, suppliers, and the communities in which we operate for their partnership. Working together, we continue to demonstrate the critical and essential role of our business in our local economies and across the globe. And now, operator, let's see if there are any questions.
spk03: 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. Our first question comes from Martin Englert with Seaport Research Partners. Your line is now open.
spk00: Good morning. Hello.
spk05: Good morning. Good morning. How are you?
spk00: Good.
spk05: Good. Thank you. A question of market fundamental trends persist over the foreseeable future. What other levers and options does the company have to address this if we look forward and we're in an environment 12 months from now where fundamentals just haven't changed for whatever various reasons? I guess, how do you think about your options? Have you considered if some of the Ferris facilities aren't inherently profitable, potential temporary titling of them until the market turns around?
spk00: So let me take that to start, and then Stefano, why don't you add in as well. So when we think about what is the path to expand our margins, there are really three major areas that we consider to be near term. One is our AMRTS, Advanced Metal Recycling Technology investments, which as I mentioned before, the majority of the benefits are still to come and should be material when fully deployed, adding a significant amount of EBITDA. And we're through the bulk of it. We still have a couple of projects to get permitted, but that is one area that we're focusing on and that I would recommend that you look at because it is so aligned with the increasing demand for non-ferrous metals. And so both near term and strategically, I think it is a very powerful investment program. The second is the completion of obtaining the benefits from the cost reduction and productivity program that we announced at the beginning of the year. As we mentioned earlier, we've achieved about three quarters of the run rate through Q3, and we expect substantially the full benefit by year end. And I think that program is going to be particularly helpful to margins now that the inflationary pressure is lower. And then third, I would focus on the investments we're making in our recycling services business line. Our 3PR, which stands for Third Party Recycling, which is our take on third party logistics, where we are providing services to customers to help them manage their recycling operations. So we're investing in that. It's contributing to increased volumes. And we're continuing to invest in digital tools in our pick and pull franchise in order to access previously untapped sources of supply. So I'd focus the attention on that. And then, Stefano, you might want to just mention our process for asset monetization.
spk01: Correct. Martin, you know, we look at our operating platform and evaluate our portfolio on an ongoing basis. That includes, you know, looking at various metrics from a performance perspective, as well as, you know, looking at asset monetization opportunities, if that were to be the case.
spk05: Any more color on the asset monetization or these maybe smaller businesses that you're evaluating or something higher level that's larger like the steel mills business?
spk00: We routinely look at our portfolio to see whether our sites are still in the best places. And so we see that particularly in our pick and pull franchise. where over the years we have monetized certain assets and moved development to other places. So it is something that we look at routinely. And when you mentioned in your question underperforming sites or idling sites, that is something that we've done also in the past that's very focused on where are supply flows coming, What are we pushing through with those sites and are they long-term holds or should they be monetized and repositioned elsewhere?
spk05: The reported export Ferris price seemed a bit weak relative to the benchmark indices in the quarter. Maybe touch on in some more detail the markets you were selling into if you feel like you had to sell at maybe more competitive prices versus the benchmarks on average to secure volumes across the assets.
spk01: I'll take that one, Martin. As you know, benchmark index prices for recycled metals are published on a gross basis before freight cost. So when you compare to our average net selling prices, those are on a net basis, net of freight. So the net selling price is a reflection of where we sell to in which geography, meaning that the mix of sales destinations can create some deviations compared to gross benchmark prices. As I mentioned in my remarks, our top sales destination in the quarter is where Bangladesh and India on the West Coast and Turkey from the East Coast. And overall, markets on the sales side are highly competitive. We sell to where demand is greatest and we view those freight rates as a pass-through.
spk05: Can you touch on what was happening with freight rates, in particular East Asia? I know that there's been In the container market, there's been some serious inflation there in recent history. In the bulk market, it could be a little bit different, but maybe how the freight rates are today over the last quarter, looking at the West Coast to get it to the consumers in East Asia and how that compares to history, whether they're inflated or not.
spk00: So I'll start with saying that our freight rates for bulk were flat, pretty much flat sequentially, Q3 to Q2 this year. They're up year over year due primarily to the situation in the Panama and Suez canals. But as you know, as you're aware, they're pass-throughs for us. So we didn't really see any impact sequentially and the canal situations the rates have been adjusted for that over the course of the last 12 months.
spk05: Okay. When you look at your footprint, is there anything unique about the regional markets on Ferris recycling where the assets are operated and located within that makes scrap collections more challenging with the lower margins versus the broader U.S. market as a whole?
spk00: The one thing that I would say is that there are certainly different regulatory environments across regions. So if you look at, for example, the West Coast regulatory environment versus other regions in the U.S., that could impact operating costs. Not so much necessarily actual scrap collection costs, but when you look at what it costs to get to a a product ready for sale, you do see regional differences from a regulatory perspective. But as you know, Martin's scrap collection is very local, not national, so really it's the sub-regional market levels that are typically the best benchmarks.
spk05: Understood. Could you share some color on the underlying profit availability, EBITDA per ton of the steel mills business, maybe some goalposts or how that looks for the quarter and the trailing 12 months?
spk01: I'll take that one, Martin. As you know, we report our results on one segment and that's on a consolidated basis. So we do not provide the steel mill contribution separately. Obviously, we have said before, in the current market, the contribution, right, of our steel mill and from the sale of finished steel of this integrated mill that we have remains, you know, the mill remains a significant contributor to our consolidated performance. And spreads remain healthy in historical context, although obviously they are lower. they have declined from the all-time highs that we had seen in fiscal 22 and early 23. And I'll leave it at that.
spk05: Qualitatively, are you able to discuss going through the business? You provide... various metrics across the business lines. I understand that it's just a consolidated group result, but, you know, with a Ferris business, a Seals Mills business, auto parts business, non-Ferris business, of all the major, and services business too, but of all the major businesses, how many of them were EBITDA profitable? over current quarter trailing 12 months. I'm trying to get a sense. I mean, I suspect that the steel mills business embedded in there is probably a large portion of the positive EBITDA contribution. Non-Ferris probably improved. I would guess Ferris is probably negative. I'd be a little bit unsure on the auto body business and assume that services is probably positive.
spk01: Again, I think that the answer I gave you before as far as not breaking apart the results in the way they are describing, we have one integrated platform, so all these businesses are integrated, including the mill. As we said before, we look at our portfolio very focused on making sure that actually from a variable contribution perspective, every business that we have is contributing positively to results, and all of them were. So I think that that's the level of detail we can provide at this time.
spk05: Okay. I appreciate the call. Thank you, and good luck. It was nice to see the cost reduction efforts seem to be running a little ahead of the initial plan as far as timing. So nice job there.
spk00: Thank you.
spk05: Thank you.
spk03: Thank you. One moment for our next question. Our next question comes from Samuel McKinney with KeyBank Capital Markets. Your line is now open.
spk02: Hi, Cameron. Good morning. Stefano, how are you? Good. Good morning. Good. I'll start again on the ferrous export market. Despite headwinds from domestic consumption rates in Turkey and the impact of Chinese exports, you cited your export volumes were solid quarter over quarter. Any way to frame up the impact that those delayed cargo ships had in your fiscal third quarter and how dynamics of that market have developed over the course of this summer?
spk01: Yeah, I'll start, Sam, here. And just from the perspective of the volumes, right, which were up 13% on the ferrous side sequentially, really two drivers there. One is the seasonality that we see on flows that came through, despite the fact that flows, you know, remain, when we look at, you know, prior years, they remain tight from a sequential perspective compared to the winter. And I would say that that's probably the majority of what makes up the increase, and the rest is from the delayed cargoes that we had at the end of Q3, which we shipped in Q3. You know, with the higher volumes, we have also higher inventories, and so we look for those sales to continue into Q4. Okay.
spk02: Any way to frame up the volume on those delayed cargo ships, how much they benefited the quarter?
spk01: I would say it's more around one-third of that increase sequentially.
spk02: Okay, thanks. That's helpful. And then moving into non-Ferris, global Zorba pricing remains pretty frothy. You've mentioned before that the tight premium of Twitch over Zorba can make conversion less attractive. How do you view that market as Zorba prices remain high?
spk01: Yeah, I'll start on that one. So obviously, with higher Zorba prices, right, irrespective of whether we process the Zorba into higher-valued, you know, Twitch and other furnace-ready materials, the higher value of Zorba, you know, flows through our margins, and that's a positive contributor. So the higher the Zorba price, the better the margin. From the perspective of the processing itself, obviously, we look at what we are able to generate in additional contribution from the processing, compare that to the processing cost, and if the market conditions, which is mainly driven by that Twitch to Zorba premium, if that is high enough. and beneficial, we will process the desorber. And if not, we are going to forego that option. So it's truly about a product optionality. That's what our advanced aluminum separation systems that are currently operational allow us to have is that product optionality, which comes in handy, and we can toggle between processing and not. So in the current environment, those market conditions and compression in
spk02: In that in that premium lead us to to not processing the absorbent to twitch Yes Lastly for me the this year's capex of 75 to 80 million dollars Should we expect a similar sort of low range next year as well?
spk01: Yes We have you know, we have that range for the current year what we have not provided right a target for for next year and In the current environment with, you know, compressed spreads and lower performance, clearly our CapEx is part of our balanced capital allocation. Our CapEx is something that we look at, and we have the ability to adjust our CapEx spend to align with those market conditions and company performance and cash flow trends and reprioritize certain projects Clearly, the adjustments or tweaks in that spend does not impact our investments to complete the advanced non-ferrous recovery systems. We continue full steam on that, and we also continue to grow our recycling services. So when I step back and I look at those levels of capex, you know, one way is to look at what we're spending today and continue to, you know, to think about that as ability to flex The other way to look at it, you know, I do that from a depreciation perspective. You know, we have depreciation around $95 to $100 million on an annual run rate currently. That's another way to kind of look at a longer-term, you know, capex spend potential. Okay, great. That's it for me.
spk00: Thank you.
spk01: Thank you.
spk03: Thank you. This concludes our question and answer session. I would now like to turn it back to Tamara Lundgren for closing remarks.
spk00: Thank you, and thank you everyone for your time today. We look forward to speaking with you again when we report our fourth quarter results in October. In the interim, stay safe and stay well.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect.
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