Radius Recycling, Inc.

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.

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.

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.