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spk03: The conference will begin shortly.
spk02: To raise your hand during... Good day and welcome to the Schnitzer-Steeles Conference Call, fourth quarter 2022 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 that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Michael Bennett with Investor Relations. Please go ahead.
spk04: Thank you, Cherie, and good morning. I am Michael Bennett, the company's Vice President of Investor Relations. I am happy to welcome you to Schnitzer Steel's earnings presentation for the fourth quarter and 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-K, 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 10-K. 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. Good morning, everyone, and welcome to our fiscal 22 fourth quarter earnings call. We appreciate your interest in our company, and we look forward to sharing our results with you this morning. Our fiscal 22 results represent the second best in our company's 116-year history. They would not have been possible without all our employees living our core values of safety, sustainability, and integrity, and operating with agility and resilience. On today's call, you'll hear about how our company is navigating the current market environment where macroeconomic factors are challenging, and how we are positioned for what we believe is a very bright future for recycled metals. But before we begin, I'd like to take a moment to formally welcome Stefano to the CFO earnings call seat today. As we previously announced, Stefano was promoted to the CFO role on September 1st after serving as our Deputy CFO and Chief Accounting Officer for the last four years. Welcome Stefano and congratulations. I also want to take a moment to thank our former CFO, Richard Peach, for his excellent leadership of the finance organization. As many of you are aware, for the last several years, Richard had been responsible for both the finance and strategy functions. In light of the importance of our strategic growth initiatives, we asked Richard to dedicate his time to leading our strategy organization as Chief Strategy Officer. Richard, we look forward to your continued success in this role and to your joining us from time to time on this call. Today on our call, I'll review our full year and Q4 financial results, the trends affecting our business, and progress on our strategic activities. Stefano will then provide more detail on our financial performance, our capital structure, and our capital investments. I'll wrap up, and then we'll take your questions. So let's turn now to slide four to get started. We expect to publish our ninth annual sustainability report in the coming weeks. In advance of its publication, I'd like to highlight a few examples of the significant progress we made this year against our sustainability goals, which are centered on our framework of people, planet, and profit. First on people. For fiscal 22, like our financial results, our team delivered the second best safety performance in our company's history. with 90% of our facilities free of any lost time injuries. We've made excellent progress in identifying and addressing potential hazards before they become injuries. While we still have work to do to keep achieving year over year improvement in our safety performance, our team's commitment to safety continues to be reflected in these results. In addition, I'd like to highlight that in fiscal 22, we were certified for the second consecutive year as a great place to work, and the Ethisphere Institute named us one of the 2022 World's Most Ethical Companies for the eighth consecutive year. We believe employee engagement and initiatives focused on diversity, equity, inclusion, community service, and job satisfaction contribute significantly to our operational performance, the achievement of our strategic goals, and the growth and development of our employees. Moving to our planet goals we're also well on our way to achieving our commitment to reduce greenhouse gas emissions at our recycling operations by 25% by fiscal 25 against our 2019 baseline and maintaining 100% net carbon free electricity use across our company for the second consecutive year. We're meeting these goals primarily through significant investments in state-of-the-art emissions control systems for our metal shredding operations and more efficient operating equipment. And earlier this year, we introduced Green Steel, our line of net zero carbon emission steel products from our Cascade steel mill. The launch of our Green Steel product line provides our customers with net zero steel solutions as they build tomorrow's essential infrastructure. Now let's turn to slide five. I am very proud of the results our team achieved in fiscal 22. Our adjusted EBITDA of over $300 million was 8% higher than fiscal 21. Our year-over-year fair sales volumes were 5% higher and our non-fair sales volumes were 16% higher. Our full year operating cash flow of almost $240 million reflects the continued profitability of our business, as well as strong working capital management. It's our highest annual operating cash flow since fiscal 12. Our fiscal 22 performance was also well above our three and five year average trends, underpinned by higher sales volumes, progress on our strategic initiatives, productivity improvements, and the benefits from the rollout of our one schmitzer organizational structure. During fiscal 22 we invested in capital projects to upgrade our equipment and infrastructure and for investments in environmental and safety related assets and advanced metal recovery technology systems. We returned capital to our shareholders through our quarterly dividend and we repurchased 3.5% of our outstanding shares. Our fiscal 22 adjusted ROCE was over 16%, significantly higher than our cost of capital. Let's turn now to slide six to review our Q4 results. Earlier this morning, we announced our fiscal 22 fourth quarter adjusted earnings per share of 50 cents. Our fourth quarter results were adversely impacted by a significant decline in Ferris and non-Ferris sales prices and demand, tighter supply flows resulting from the drop in prices and the weaker economic environment. and disruptions due to the extended outage at our Everett, Massachusetts, shredding operations to replace damaged equipment. We generated strong operating cash flow, reduced our debt, repurchased almost 2% of our outstanding shares, and paid our 114th consecutive quarterly dividend. Let's turn to slide five, sorry, let's turn to slide seven to review price trends and supply flows. The fairest and non-fairest price changes during the quarter were significant, and recessionary fears and economic growth concerns remain at the forefront of global markets. Recent metal price declines have been heavily influenced by macro concerns globally, including slower growth, the impact of China's COVID lockdowns, inflationary pressures, the strength of the U.S. dollar, the war in Ukraine, and steel inventory destocking. Ferris export prices declined rapidly and steeply at the beginning of the quarter by over $250 per ton from the peak in Q3 and were quite volatile during July and August. Since the end of the quarter, reported prices have been more stable, higher than the five-year average, and trading in the range of $375 to $400 per ton delivered, depending on the region. High energy costs in Turkey and slow demand in Europe have been offset in part by demand in South Asia, where energy problems are not as severe. In the U.S. domestic market, Ferris prices have fallen for six consecutive months, although absolute prices remain higher than the 10-year average. Prime grades experienced the largest decreases due to an overhang at many mills. Prime is now trading below shredded for the first time since 2016, impacted by lower manufacturing activity and lower steel demand. The average US steel mill utilization rate has been below 80% for 15 consecutive weeks. Turning to non-ferrous, as you can see in the upper right chart on this slide, base metal index prices for copper and aluminum have dropped 33% and 45% respectively from their peaks in Q3. Since the end of the quarter, prices have stabilized at these levels due to concerns about availability at these lower prices. These concerns are valid, as the significant drops in ferrous and non-ferrous prices have led to considerably tighter supply flows across all regions and channels, exacerbated by inflationary pressures, which have increased collection costs and reduced consumer scrap generation. Turning to finished steel, metal spreads reached record highs, as falling scrap prices outpaced the decline in finished steel prices. While the construction markets are softening a bit due to interest rates and inflationary pressures on construction costs, the Architectural Billings Index and the Dodge Momentum Index are both signaling strong growth in the non-res, commercial, and industrial sectors. In addition, increased demand related to the U.S. Infrastructure Bill, the Inflation Reduction Act, and the Buy Clean Directive is expected to materialize in 2023 and beyond. With the higher focus on low carbon steel, our steel mill is very well positioned to meet this increased longer term demand. Near term conditions, however, appear weaker than what we've experienced for the last two years. At Schnitzer, we focus on the things we can control, and we have a long history of successfully navigating through challenging times. As we look at the first quarter, we expect a softer environment than we saw in Q4. Prices fell in both September and October, along with steel mill utilization. The outage at our Everett facility, which impacted our supply flows during Q4, has continued into Q1. While we expect to be able to restart the shredder very shortly, our first quarter results will be adversely impacted by this extended shutdown. In addition, changes in regulatory requirements impacting our shredder facility in Oakland resulted in certain operational limitations for disposal of our auto shred residue. These issues have recently been resolved. However, the resulting costs and adverse impacts on volumes will also be reflected in our Q1 results. Looking beyond the current macro uncertainty and the Q1 disruptions, we expect the positive structural trends of increased demand for ferrous and non-ferrous recycled metals to remain firmly intact. A low carbon economy and many low carbon technologies are widely acknowledged to be more metal intensive. The use of recycled metals is now an important strategic solution for companies, industries, and governments that are focused on carbon reduction. And it is a critical part of every community's commitment to supporting a circular economy. So let's turn to slide eight to discuss these longer term demand trends in more detail. Decarbonization is a powerful structural driver of demand for recycled metals. Increasing the use of recycled metals in low carbon technologies and infrastructure investments is a great example of how old economy tools will lead the way to decarbonization of the new economy. 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 steelmaking 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. And scrap usage in China's steelmaking is expected to increase by up to 50 percent, driven by EAF replacement capacity as well as by the increased use of scrap in their BOFs. Let's turn now to Slide 9 to review the strategic actions we have underway aligned with these long cycle trends. We are focused on four strategic priorities. First, technology investments in advanced metal recovery systems at our major recycling operations to enable us to extract more non-ferrous metals from our shredding activities, lower our operating costs and improve our margins, expand our product offerings and customer base, and reduce materials going to landfills. Second, volume growth. Our multi-year focus on increasing our ferrous and non-ferrous volumes has led to an annual 6% volume growth rate since fiscal 16. We've achieved this through a combination of organic growth, acquisitions, and improved recovery of non-ferrous materials through our shredding process. expansion of our products and services to meet the evolving demand for recycled metals, such as the launch of our net zero green steel products and the reverse logistics services we provide to manufacturers and retailers. And fourth, productivity initiatives that we undertake as part of our continuous improvement culture, where our focus is on efficiencies in processing, procurement, and pricing. In the face of significant inflationary pressure, we're targeting new productivity initiatives of $40 million in fiscal 23, nearly double the annual benefits we have achieved in each of the preceding two years. So now let me turn it over to Stefano for a more detailed review of our financial and operating performance. Stefano?
spk05: Thank you, Tamara, and good morning. I'll start with a review of our consolidated results and provide an update on our ferrous sales and the market dynamics. For the full year fiscal 22, our adjusted EBITDA was $313 million. Adjusted EBITDA per ferrous ton increased year over year and reached $68. Adjusted EBITDA in the fourth quarter was $40 million, or $32 per ferrous ton. While our metal margins benefited from forward sales made at higher prices early in the quarter, the majority of the sequential decline in quarterly results was attributable to the sharp drop in ferrous and non-ferrous selling prices, which led to a compression in metal spreads. The sharpness of the price decline also generated a significant adverse accounting impact from our average inventory costing method of approximately $23 per ferrous tonne. which compares to a benefit of $4 per periston in the third quarter. However, the contribution from our steel mill operations was strong during the fourth quarter, supported by near-record finished steel prices. Our SG&E expense decreased $8 million sequentially, primarily as a result of lower incentive compensation accruals, which, together with benefits from productivity initiatives, helped partially offset the impact of environmental compliance and inflation on our operating costs, primarily for labor, energy, logistics, and waste disposal. In addition, we had a detrimental impact from the extended shredding operation outage in Everett to replace damaged equipment, net of recognition of insurance recoveries of $6 million. Average net fair selling prices were down by 28% sequentially, and by 14% year-over-year. Our ferrous sales volumes were up sequentially by 12%, primarily reflecting four bulk cargoes delayed at the end of the third quarter. Fourth-quarter sales volumes also include contributions that came from the first full quarter of ownership of Encore Recycling. Reflecting the increased size of our domestic business, we shipped 38% of our ferrous volumes to the U.S. market, up from 27% in the prior year quarter. Our largest sales destinations for ferrous exports in the quarter were Bangladesh, Turkey, and India. Now, let's move to slide 11 for an update on non-ferrous sales and the market dynamics. We sold our non-ferrous products to 17 countries, with the major export destinations being India, Malaysia, and China. the share of domestic sales of non-ferrous increased to 45% in the fourth quarter, compared to 38% in the prior year, reflecting more attractive economics, better logistics, and the contribution of our acquisitions. Our product mix was highly diversified, with sales of Zorba representing 30% of our non-ferrous volumes, aluminum 27%, copper 14%, twitch 10%, and with stainless, Zurich, and other non-ferrous metals making up the balance. As Tamara mentioned, while market selling prices decreased in the range of 30% to 45% from their highs, our average net selling prices for non-ferrous declined only 7% sequentially, as we benefited from forward sales made at higher prices prior to the steep decline in non-ferrous markets. Non-ferrous sales volumes declined sequentially by 8%, primarily due to tighter flows resulting from the drop in prices. Year over year, non-ferrous volumes were up 13%, including the contributions from both Columbus Recycling and Encore Recycling. Now, let's move to slide 12 to provide an update on our advanced metal recovery technology investments. We continue to progress our technology deployment focused on increasing metal recovery and the volume of non-ferrous materials from shredding operations. Once fully operational, we expect non-ferrous volumes recovered from shredding to increase in the range of 20%. Benefits also come from our ability to generate more furnace-ready, higher valued products and creating product optionality. We are targeting completion of construction of our technology initiative by the summer of 2023. As you can see in the slide, our program is comprised of seven primary non-ferrous recovery systems at our major shredder facilities. They will be the main drivers of the projected increase in recovered volumes. Of these systems, three are major aluminum and four are major copper recovery systems, of which one is operational to date. Our initiative also includes an aluminum separation system on each coast, one of which is operational and four supplemental copper separation systems, of which three are operational. We are now targeting substantial achievement of the estimated full run rate benefits of $10 EBITDA per first ton by the end of calendar year 2023. While the contribution from the fully operational assistance was not yet material in the fourth quarter, as our major systems become fully operational, we expect the quarterly benefit profile to gradually increase during fiscal 23, beginning with the first quarter, and to reach approximately two-thirds of the full targeted run rate by the end of fiscal 23, subject, of course, to construction and permitting timelines. We expect the overall capital investment to be in the range of $130 million, of which $113 million have been spent to date, leaving just over $15 million to complete the projects in fiscal 23. Now let's move to slide 13 to discuss our steel mill performance and West Coast markets. Reflecting healthy demand in the quarter in our West Coast markets, average selling prices for finished steel were up year over year by 22% and off only 1% from the highest ever levels reached in the third quarter, supporting robust metal spreads at our mill. Finished steel sales volumes of 125,000 tons were down 7% sequentially. our average rolling mill utilization for the quarter was 93%, which was significantly higher than the US average of less than 80%. Now, let's move to slide 14 and discuss cash flow, capital structure, and our outlook for the first quarter. Operating cash flow in the fourth quarter was strongly positive at $180 million, driven by profitability and a significant reduction in working capital including from the lower price environment and the reduction in inventories due to the four bulk shipments delayed from the prior quarter. For the full year, our operating cash flow was $238 million, driven by strong profitability and effective working capital management. Benefiting from the strong cash flow generation, our net debt was $205 million, a reduction of more than $100 million sequentially. We amended our credit facility agreement during the quarter, which provides for more favorable pricing, extends its maturity to August 2027, and upsizes the borrowing capacity by $100 million to $800 million. We have a healthy balance sheet with net leverage of 18% at quarter end, primarily reflecting our investments in acquisitions during the fiscal year, and our ratio of net debt to adjusted EBITDA is 0.7x. As part of our balanced capital allocation strategy, we return capital to shareholders through our quarterly dividend and the repurchase of 500,000 shares of our Class A common stock for $16 million. CapEx in the fourth quarter totaled $52 million. For Fiscal 22 as a whole, CapEx was $150 million, a third of which was for investments in growth driven primarily by our non-ferrous recovery technology projects. Looking ahead to fiscal 23, we currently expect our CapEx to be in the range of $120 million to $140 million. Around a third will be for growth projects, including the completion of our technology initiatives, investments to support recycling services expansion, and planned post-acquisition CapEx at Columbus and Encore Recycling. The remaining capex will be for maintaining the business and environmental-related capital projects. Our quarterly run rate of depreciation and amortization approximated $20 million during the fourth quarter of fiscal 22. As major capital projects are completed, we would expect this quarterly run rate to gradually increase to $25 million by the end of fiscal 23. Our effective tax rate was an expense of 11% on our fourth quarter results and included benefits of approximately $2 million associated with certain discrete tax items. For fiscal 23, we expect our tax rate to be in the range of 23% subject to financial performance. While we are just over halfway through the quarter, I'll now turn to our outlook for the first quarter of fiscal 23, which is based on market conditions and information we have today. We expect our ferrous volumes to be down 15% year over year due to tighter supply flows and the impact on volumes from the shredder outage at our Everett facility and the regulatory issue in California. Non-ferrous sales volumes are expected to be higher year over year by approximately 10%. Finished steel sales volumes are expected to be down about 10% sequentially due to normal seasonality and a softening in West Coast demand for wire rod products. Our mills utilization is expected to be in the range of 80% due to a planned maintenance outage. We expect the disruptions in Everett and Oakland to lead to an adverse impact in the first quarter, estimated at $15 per ferristone from a combination of lower intake and sales volumes and higher costs. Excluding this impact, we expect our consolidated adjusted EBITDA per ferrous ton to approximate the $32 achieved in the fourth quarter. Looking at some of the underlying sequential dynamics, our recycling metal spreads in the first quarter will not have a similar benefit of forward sales at higher prices that we saw in the fourth quarter. We also expect the contribution from our steel mill to be reduced due to the impact of lower finished steel prices and sales volumes. We anticipate the compression of margins resulting from these two items, together with the impact of tighter scrub flows, will substantially offset the sequential improvement from average inventory accounting, which is projected to be a detriment of approximately $5 per first ton in the first quarter, compared to a detriment of $23 per first ton in the prior quarter, and the partial benefits of our new productivity initiatives. We expect our net debt to increase sequentially, driven by a detriment from working capital on operating cash flow, including from payment of incentive compensation previously accrued for fiscal 22 performance. Looking beyond our first quarter operational disruptions, even in an environment of tight supply and low mill industry utilization, we expect the benefits of our non-ferrous recovery initiatives and realization of the full run rate contribution from our new productivity initiatives to provide a path to an expansion of margins. We also expect to generate operating leverage from volume growth once flows improve. And with that, I'll turn the call back over to Tamara.
spk00: Thank you, Stefano. As we move forward in fiscal 23, our strategic growth investments and our productivity initiatives are expected to deliver additional material benefits. We have a strong balance sheet with low leverage and interest expense a track record of delivering positive operating cash flow, an ability to invest in the growth and productivity of our company, and an uninterrupted record of returning capital to our shareholders through our dividend. We are well positioned to benefit from the global focus on decarbonization, the increased metal intensity of low carbon technologies, and the continued growth in U.S. and global EAF steelmaking capacity. In closing, I'd like to thank our employees for their dedication to serving our customers and communities, supporting our suppliers, and demonstrating the critical and essential role of our business and industry in the economy. You have demonstrated once again why we have continued to be a leader in the recycling industry for over a century. And now, Cherie, let's open up the call for questions.
spk02: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster.
spk03: And our first question will come from Emily Tang with Goldman Sachs.
spk02: Please go ahead.
spk01: Good morning, Tamara and Stefano. Thank you for taking the time this morning. I wanted to ask around the new $40 million of productivity initiatives in FY23. Could you please outline some of the actions that will be taking a drive, that $40 million sort of uplift there? And how should we see the cadence of these benefits materialize throughout the year?
spk00: Sure. Stefano, why don't you take that?
spk05: Sure. So, good morning, Emily. Thanks for the question. So, our productivity initiatives are, you know, aimed to help offset inflationary pressure and operating costs. and really are looking at things like achieving production efficiencies, increasing yields, generating savings from procurement initiatives, optimizing logistics, and the like. And we have a process if you want to track these initiatives based on KPIs and other data points to support and ensure achievement, so we feel comfortable about our ability to achieve those. And from a timing perspective, Most of the initiatives are being implemented during Q1, our first quarter, so we expect partial benefits in Q1. I would say about half the run rate of the benefits are in our first quarter results, and then I would expect substantially all of the full run rate benefits to be achieved during our second quarter.
spk00: I would add to that that we have a track record of doing this, even in market environments that are positive. So as I mentioned in my remarks, in each of the preceding two years, for example, we have delivered productivity benefits in the range of $20 million or so each year. So this is something that we do as part of our continuous improvement culture, and as Stefano said, it's something that we track on a line-by-line basis.
spk01: Great. Thank you. And just a quick follow-up, if I may. Around the 1Q23 outlook, Stefano, you mentioned, I think, that consolidated EBITDA per ton was to approximate $32 we saw in the fourth quarter. I just wanted to confirm that had also included the inventory account detriment of I think it was $5 a ton there.
spk05: Thanks, Emily. Yes, so our outlook for the first quarter of $32 per ton includes the $5 from the average inventory accounting, which is a detriment. And just to reiterate that outlook, the $32 basically exclude the impact, the disruptions associated with the average shutter outage and the Oakland regulatory change. So we view those kind of as unique items, and so we are looking beyond that, and we're excluding those, and that's how the 32 dollars per ton is based.
spk01: Great, thank you.
spk02: And as a reminder, if you would like to ask a question, please press star 1-1 on your telephone. And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Ms. Tamara Lundgren for any closing remarks.
spk00: Thank you, Cherie, and thank you everyone for your time today. We look forward to speaking with you again in January and over the course of the next few weeks during investor meetings when we report our first quarter results in January and can review the Q4 and full year results and outlook that we discussed today. In the interim, stay safe and stay well. Thank you.
spk02: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
spk03: The conference will begin shortly.
spk00: To raise your hand during Q&A, you can dial star 1 1.
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