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spk01: Thank you for standing by and welcome to the Schnitzer Steel first quarter 2022 earnings release call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Michael Bennett, Investor Relations. Please go ahead, sir.
spk04: Thank you, Jonathan, and good morning. I'm Michael Bennett, the company's Vice President of Investor Relations. I am happy to welcome you to Schnitzer Steel's earnings presentation for the first quarter of fiscal year 2022. In addition to today's audio comments, we have issued our press release and posted a set of slides, both of which you can access on our website at schnitzersteel.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 2, we may make forward-looking statements on our call today, such as our statements about our targets, volume growth, and future margin expansion. Our actual results may differ materially from those projected in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statement is contained in slide two, as well as our press release of today and our Form 10-Q. Please note that we will be discussing some non-GAAP measures during our presentation today. We've included a reconciliation of those metrics to GAAP in the appendix to our slide presentation. Now, let me turn the call over to Tamara Lundgren, our Chairman and Chief Executive Officer. She will host the call today with Richard Peach, our Chief Financial Officer and Chief Strategy Officer.
spk00: Thank you, Michael. Good morning, everyone, and welcome to our fiscal 22 first quarter earnings call. I hope you all had a good holiday break and, like me, are looking forward to a healthier, safer, and even stronger 2022. The results that we will discuss today are Schnitzer's best first quarter earnings on record. They would not have been possible without all our employees, from our frontline workers to those who've been working remotely, living our core values of safety, sustainability, and integrity. Many of our employees are listening to this call today. I'd like to congratulate you on your first quarter achievements and to thank you for your extraordinary efforts in serving our customers and supporting our suppliers in the face of significant COVID-related labor and logistics constraints. Our success is the direct result of how you have embraced these values, and your performance reflects the collaboration, innovation, and resilience that define our culture and our company. I'm very proud of what you've accomplished during these most challenging times. On our call today, I'll review our quarterly financial results and the market and macroeconomic trends affecting our business. I'll also provide an update on the strategic initiatives and investments we have underway to address evolving industry dynamics and create long-term value through the cycle. Richard will then provide more detail on our financial performance, CapEx investments, and capital structure. I'll wrap up, and then we'll take your questions. So, let's turn now to slide four to get started. As one of North America's largest metal recyclers, Sustainability is at the core of what we do and how we operate, and has been since our founding in 1906. In mid-December, we issued our eighth annual sustainability report, which highlights our company's commitment to creating a more sustainable future by supplying our customers with high-quality, low-carbon, recycled metal, and finished steel products. This year's sustainability report describes the significant progress we've made against our people, planet, and profit goals. In fiscal 21, among other accomplishments, we achieved our safest record, our safest year on record. We reached our goal of 100 percent net carbon-free electricity use at our facilities ahead of our fiscal 22 target, and we reduced our scope one and two emissions by 19 percent versus our 2019 baseline. We were honored this year to be recognized by a number of organizations for our leading performance in sustainability. I encourage you to visit our website to view our latest sustainability report, which describes how we help conserve resources, how we innovate to use less water and energy and to generate less waste, how we create a safe, ethical, engaging, and inclusive workplace, and how we give back to the communities where we operate. So now let's turn to slide five. Earlier this morning, we announced our fiscal 22 first quarter adjusted earnings per share of $1.58, almost triple the results from a year ago, and our best first quarter performance on record. Our first quarter results benefited from the strong global demand for recycled metals, a robust West Coast market for finished steel products, and average selling prices for ferrous, non-ferrous, and finished steel products at or near multi-year highs. Our Q1 adjusted EBITDA per ferrous ton was $68, far exceeding the $38 per ton of a year ago. Our year-over-year ferrous and non-ferrous sales volumes increased by 9% and 11%, respectively, and benefited from our acquisition of the Columbus recycling assets on October 1st. Our steel mill continued to ramp up production during the quarter as operations resumed following the melt shop outage in late May. Rolling mill utilization was on an increasing trend throughout the quarter, with November utilization reaching 91 percent. Our balance sheet remained strong, which enabled us to continue our uninterrupted record of returning capital to shareholders through the issuance of our 111th consecutive quarterly dividend. Our record results this quarter would have been even stronger had several contracted shipments for November not slipped into December due to COVID-19-related supply chain disruptions. While we expect to see a strong year-over-year increase in contracted ferrous and non-ferrous sales in Q2, at volume levels consistent with Q1, the supply chain impact on shipments is currently difficult to predict. As a result, we will provide our forward-looking guidance later in the quarter, around the end of February. Let's turn now to slide six for a review of pricing trends for recycled metals and finished steel products. As you can see on this slide, market prices for ferrous scrap during Q1 remained near multi-year highs. These favorable pricing levels are supported by cyclical and structural trends, including the increased use of recycled metals and the global focus on decarbonization. Export sales off the East Coast were broad-based during the quarter. Ferris prices peaked at multi-year highs in mid-October, then softened in mid-November largely due to a slowdown in demand from Turkey. However, prices still remained at historically strong levels. Prices for export sales off the West Coast during the quarter trended similarly to the East Coast, with the mid-November softening driven by lower steel prices and lower billet and scrap import demand from China. On the domestic front, fair scrap demand and prices remained high, as steel capacity utilization reached 85% during the quarter, exceeding pre-pandemic levels. Copper and aluminum scrap prices traded at or near multi-year highs, benefiting from tight supplies, shipping constraints, and deployment of low carbon technologies. Prices for PGM metals, however, fell during the quarter, primarily due to reduced auto production. Demand for finished steel continued to increase, with prices reaching their highest levels on record. Supply flows remained robust in Q1, despite trucking and COVID-related labor shortages in certain markets. Since the end of the quarter, We have seen normal seasonality in supply flows with reported trading levels for ferrous, non-ferrous, and finished steel products higher than a year ago. Let's turn now to slide seven to discuss some of the longer-term demand trends for recycled products and services. As we have discussed on previous earnings calls, decarbonization is a powerful structural driver of demand for recycled metals. Recycled metals require less carbon to produce than mined metals, and many low carbon technologies are widely acknowledged to be more metal intensive. The use of recycled metals is recognized as an important strategic solution for companies, industries, and governments that are focused on carbon reduction. It's a differentiator for metal producers and fabricators, and it is a critical part of every community's commitment to supporting a circular economy and decreasing material going to landfills. We can see how some of these trends have translated into higher ferrous scrap metal usage in the U.S. and globally by looking at the charts on this slide. EAF's field-making capacity, which uses scrap as its primary raw material, has been expanding in the U.S. and globally and is projected to increase even further. Increasing the use of recycled metals is a great example of how old economy tools can lead the way to decarbonization of the new economy. Let's turn now to slide eight to review the strategic actions we have underway, which are aligned with these long cycle trends. This quarter's results reflect benefits from our strategic actions to leverage decarbonization trends, including increased customer demand for recycled metals and product optionality, as well as productivity and volume growth initiatives to drive expanded profitability. There are three examples I'd like to highlight this morning. First, our acquisition of eight metals recycling facilities from Columbus Recycling, which expands our platform in the robust southeast regional market with meaningful synergies. Combined with our existing facilities, this acquisition increases our footprint to 22 operating facilities in the southeast and 102 across North America. On an annual basis, these operations should increase our total ferrous sales volumes by about 7%. We also continued to progress our technology investments in advanced metal recovery systems at our major recycling operations. Extracting more non-ferrous metals, including copper and aluminum, from our shredding activities is a significant value-added process and is directly aligned with global demand trends. We expect the benefits from these projects to increase our non-ferrous volumes and revenues, to lower our operating costs and improve our margins, to expand our product offerings and customer base, and to support our sustainability objectives of increasing recycling and reducing waste. And third, our productivity initiatives that we undertake as part of our continuous improvement culture. This year, our focus is on efficiencies in processing, procurement, and pricing. to offset the inflationary environment that we're all experiencing. Our record first quarter results benefited from our team's skill and focus on this third leg of our strategic plan. Now, before turning it over to Richard, I'd like to highlight that on December 8th, we experienced a fire at our metals recycling facility in Everett, Massachusetts. There were no injuries, and property damage and loss were limited to our facility's shredder equipment and building. There was also no impact to our first quarter results because the incident occurred after the end of the quarter. Based on our current repair schedule, we expect to resume shredding operations within this quarter. We also expect that our insurance will cover most of the repair and replacement costs and a significant amount of lost income. So now, let me turn it over to Richard for a more detailed review of our financial and operating performance. Richard?
spk02: Thank you, Tamara, and good morning. I'll begin with an update on our advanced metal recovery technology initiative. We continue to progress the deployment of new technologies in several of our major facilities. Of the 13 new systems within our initiative, five are implemented and operational, with the remainder in construction or in the permitting process. In December, we completed construction of an additional advanced copper separation system that is now in operational testing and that we expect will begin processing material during the balance of the second quarter. The new technology implemented to date has already increased our product optionality. And during the first quarter, we exported 12 million pounds of high-quality new products, including twitch and chopped copper. As we roll out more systems, increase production, extract more metal, and refine our new products, we expect to increase the trend of additional non-ferrous recovered from shredding towards our target of 50 million pounds per annum, which would represent an increase in non-ferrous from shredding of approximately 20%. Subject to no further COVID-related delays to construction or to remaining permits, We are targeting rollout of all our remaining installations by the end of fiscal 2022. We continue to expect total capital investment in the range of $115 million, including the final $30 million in the remainder of fiscal 2022. Now let's turn to slide 10 to discuss our consolidated results, Ferris sales, and the market dynamics. Our adjusted EBITDA was $68 per ferrous ton, a record for our first quarter. On a year-over-year basis, this result was higher by $30, or 78%. The improved performance was driven primarily by higher average selling prices, increased sales volumes for ferrous and non-ferrous, productivity improvements, initial contributions from Columbus Recycling, and a higher contribution from our steel mill, including $3 million of insurance recoveries recognized in the first quarter. These benefits were partly offset by the impact of supply chain disruptions, lower prices for platinum group metals, and increased SG&E expense reflecting higher inflation and the tight labor market. Average net ferrous selling prices were up by 66% year over year, The last time Ferris selling prices were at current levels was back in fiscal 2011. Compared to back then, our margins per tonne in the first quarter were over 40% higher, which can be primarily attributed to our multi-year focus on productivity and the benefits of our commercial initiatives on our buy programme and sales diversification. Supply chain disruptions contributed to several of our contracted shipments for November being delayed, including for ferrous, non-ferrous, and finished steel products. The disruptions to bulk ships, containers, trucking, and labor adversely impacted our EBITDA compared to the basis of the quarterly outlook that we provided back in October. Ferrous sales volumes were up year over year by 9%, with around half of the increase coming from the first two months of operations of Columbus Recycling. Compared to our outlook, the delayed shipments of contracted sales for November had an adverse impact on our ferrous volumes of approximately 37,000 tons. We sold recycled ferrous to seven countries, with Vietnam, Turkey, and South Korea being the largest sales destinations in the quarter. The impact of average inventory accounting was neutral compared to benefits of $2 per ferrous ton in the prior year quarter. Now let's move to slide 11 for an update on non-ferrous sales and the market dynamics. Average net selling prices for non-ferrous were up by 64% year over year and recycled copper, aluminum, and Zorba traded at prices that were at or near multi-year highs. Non-ferrous sales volumes rose year over year by 11%, with around half of the increase coming from Columbus recycling. However, compared to our outlook, increased challenges in securing containers delayed shipments of 12 million pounds of contracted sales originally planned for November. We sold our known Ferris products to 15 countries, with the major destinations being the United States, India, and Malaysia. Now let's move to slide 12 to discuss our steel mill performance and West Coast markets. Finished steel sales volumes of 99,000 tons were up sequentially by 53% as we continued the production ramp up that had begun in mid-August. Average selling prices for finished steel were up year over year by 58% and in the first quarter reached their highest ever. These price increases reflected robust West Coast demand and the flow through of higher input costs, including for scrap and for other consumables. Average rolling mill utilization for the quarter was 78% and reached 91% in the month of November, reflecting an increasing trend throughout the quarter. By the end of the first quarter, we had made strong progress on rebuilding our inventories of billets and finished goods and expect to be back to a normal inventory level during the second quarter. Now let's move to slide 13 and discuss cash flow, capital structure, and our outlook for capital expenditures. Our first quarter has seasonally lower operating cash flow due to the cash payout in November each year of incentive compensation accrued in the previous fiscal year. The first quarter of fiscal 22 was further impacted by the rebuild of inventories at the mill, which added $17 million to the increase in working capital during the quarter. As the chart on the top left shows, we have a multi-year track record of strongly positive operating cash flows on an annual basis. Based on our current performance levels, we expect this annual trend to continue for our fiscal year 2022. Net debt increased to $241 million, reflecting our investment of $114 million to acquire assets from Columbus Recycling. In the first quarter, we received $30 million of initial cash advances from our mill insurers. Of this amount, $14 million has been recognized through our income statement, including $3 million in the first quarter. The recognition of the remaining $16 million through our income statement is expected to occur over several quarters. Net leverage at the quarter end was 22%, and our ratio of net debt to adjusted EBITDA was 0.7x. For fiscal 2022 as a whole, we expect to make capital expenditures in the range of $130 million to $160 million. Just under half will be for growth projects, including completion of our technology initiatives, investments to support volume growth, and post-acquisition capex at Columbus Recycling. The remaining fiscal 2022 capex will be for maintaining the business and for investments in environmental-related capital projects. Capital expenditures in the first quarter totaled $30 million net of insurance recoveries. Our effective tax rate was an expense of 19% on our adjusted first quarter results and included $3 million of discrete tax benefits arising from vesting of previously awarded share-based compensation. We look forward to providing an update on our expected second quarter performance around the end of February. I'll now turn the presentation back over to Tamara.
spk00: Thank you, Richard. The record first quarter operational and financial results we announced this morning reflect our significant progress in expanding profitability increasing our volumes, and investing in technology to support our sustainability objectives of increasing recycling, reducing waste, and enhancing our product offerings. We have a strong balance sheet, a track record of delivering annual positive operating cash flows, an ability to invest in the growth and productivity of our company, and an uninterrupted record of returning capital to our shareholders through our dividend. We are well positioned to benefit from the continued growth in U.S. and global EAF steelmaking capacity, the global focus on decarbonization, the increased metal intensity of low-carbon technologies, and additional steel and recycled metals demand driven by the recently passed $1.2 trillion U.S. infrastructure bill. In closing, I'd like to thank our employees once again for their outstanding performance. They've demonstrated why we have continued to be a leader in the recycling industry for over a century. And now, Jonathan, let's open up the call for questions.
spk01: Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Michael Lischuk from KeyBank. Your question, please.
spk03: Hey, guys. Good morning. Good morning. First, I just wanted to ask on what you're seeing in the near term in the draft market in terms of pricing. Just as of late, we've seen some softening in Ferris. And how should we think about the impacts on the cost side for spreads in the steel business as we look into the second quarter, all else equal?
spk00: Sure. So let me look at it or take you through it, east coast, west coast, if you will. As you know, on the domestic side, domestic is pricing this week, so I'm not going to comment on domestic. But on the export side, if we look off the East Coast and we look at turkey demand, buying patterns are remaining consistent. And I'm sure that you've seen, in fact, I think you reported, you know, in 2021, turkey still production was up, I think, almost 20%, which was at record highs. So we're seeing consistent buying patterns. Off the West Coast, demand is broad-based. And what's interesting is that normally we see a bit of softening this time of year due to the ripple effects of the Chinese New Year. But this year, inquiries are coming earlier due to buyers' concerns regarding supply chain impacts. So from that perspective, what we see is increased demand on a year-over-year basis, strong fundamentals for our business, and the challenge is really in logistics. not a question of demand.
spk03: Got it. And then sticking with the cost side in the steel business, I wanted to ask on the cost pressures you're seeing in fiscal 22, whether that be alloys, electrodes, labor, energy, or otherwise. But if you could frame it potentially, the per ton impact that you're expecting there on a year-over-year basis within steel in fiscal 22 versus fiscal 21.
spk00: So let me see if I can address it broadly, and then, Richard, why don't you add any specifics that you like. Broadly, we focus on our productivity initiatives to combat inflation. And so, as I mentioned in the prepared remarks earlier, we have made impacts already this year in driving benefits from our productivity initiatives to combat inflation. You know, the primary areas that we're seeing it in is non-trade procurement, as you mentioned, in labor, and obviously very much in transportation logistics. Richard, if you want to add anything, please do.
spk02: Yeah, morning, Michael. I mean, I think I would just add that you know, we're seeing steel prices at, you know, record levels in the West Coast. And, you know, these cost increases that we're talking about, you know, they eventually, you know, they pass through on the pricing side, such as freight, for example. And I would also note that as far as, like, energy costs go, they are actually a very small proportion here. of our overall cost of goods sold at the mill. So we're not seeing a change that's material enough for us to merit calling out on that side.
spk03: Okay. And just lastly for me, I wanted to ask about the non-ferrous trade dynamics given the automotive supply chain issues that we've been facing broadly. And are you seeing any easing there in the supply chain bottlenecks on the auto side and wanted to get your take on how you see that playing out over the course of the year as it impacts your business? Thanks.
spk00: Sure. So on non-ferrous in terms of our purchases and sales, we're obviously, as you mentioned earlier, seeing supply chain constraints, availability of containers be significant. and clearly contributed to a delay in shipments in Q1. But what I'll reiterate is that demand continues to be strong. And so on a year-over-year basis, we're seeing higher demand and expect to see higher contracted sales. But there is obviously availability of containers does create a backlog in flows.
spk01: Thank you.
spk00: Thank you.
spk01: Thank you. Once again, if you have a question at this time, please press star then 1. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Tamara Lundgren for any further remarks.
spk00: Thank you, Jonathan, and thank you, everyone, for your time today. We look forward to speaking with you again in April when we report our second quarter results. In the interim, stay safe and stay well. Thank you.
spk01: Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect.
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