Radius Recycling (RDUS) 24 Oct 242024 Q4 Earnings call transcript

Good day, and thank you for standing by. Welcome to the Radius Recycling's Fourth Quarter 2024 Earnings Release Call and webcast [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Bennett, Investor Relations. Please go ahead.

Thank you, Victor, 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 fourth quarter of fiscal 2024.

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 radiusrecycling.com.

Before we start, let me call your attention to the detailed safe harbor statement on Slide 2, 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 2, 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 statements is contained in Slide 2 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.

Thank you, Michael. Good morning, everyone, and welcome to our fourth quarter earnings call. I am joined today by our Senior Vice President and Chief Financial Officer, Stefano Gaggini. I'll start this morning's discussion with an overview of our fiscal '24 fourth quarter, a review of market conditions and an update on the strategic actions we have underway to address current industry dynamics and create long-term value through the cycle. Stefano will then cover the quarterly financial and operating results in more detail. I'll wrap up, and then we'll take your questions.

Before turning to the next slide, I'd like to take a moment to recognize our employees for delivering another year of improved safety performance. In fiscal '24, we achieved a 16% year-over-year reduction in our total case incident rate and almost 90% of our facilities had no lost time incidents.

Our year-over-year improvement reflects the commitment of all our employees to continuous improvement through actions like enhanced training and increased communications and reengineering practices and processes to reduce operating risk.

While we still have work to do to achieve our goal of 0 injuries, these results reflect our team's unwavering commitment to safety and their dedication to creating a safe work environment and a sustainable safety culture.

So now, let's turn to Slide 4 to review our fourth quarter highlights.

While the long-term trends for recycled metals are strong, market conditions remained challenging during the fourth quarter with tight scrap availability and softer global steel demand creating significant headwinds.

Our Q4 results were significantly impacted by the ongoing stickiness in scrap purchase costs, leading to margin compression in our financial results.

However, by focusing on actions within our control, lowering our costs, operating efficiently and executing on our strategic priorities, our team was able to mitigate some of these headwinds and deliver strong sequential quarterly improvements in both our operating and our financial results. We nearly doubled our adjusted EBITDA to $17 million. We successfully increased nonferrous sales volumes by 13%, ferrous sales volumes by 12% and finished steel sales volumes by 11% due in part to contributions from our metal recovery technology investments, new commercial initiatives and growth in our recycling services platform. We delivered substantially the full quarterly run rate benefits from our cost savings and productivity improvement program announced earlier this year. And we generated positive operating cash flow and returned capital to our shareholders through our 122nd consecutive quarterly dividend.

Looking forward, we expect continued reductions in U.S. interest rates to benefit consumer manufacturing and construction activity, which in turn should lead to improved scrap supply flows and increased demand for finished steel. The long-term demand for recycled metals is supported by structural deficits for nonferrous metals such as copper, the increased demand from manufacturers to maximize their use of recycled materials and the growth in electric arc furnace steelmaking capacity, which uses ferrous scrap as its primary raw material.

Our strategic initiatives focused on metal recovery technologies, volume growth and expansion of our 3PR services are strongly aligned with these secular growth trends.

Let's turn now to Slide 5 for a deeper dive into market conditions.  During most of our fiscal year, both finished steel and recycled ferrous metal prices softened. The decline in domestic steel prices was underpinned by both the continuing contraction in U.S. manufacturing, which is reflected in manufacturing PMI remaining in contraction for 22 out of the last 23 months and imports. The ferrous price declines during the year were largely due to both the dampening effect of elevated levels of Chinese steel exports, which reached multiyear highs and lower global manufacturing levels. Nonferrous prices reflected strong global demand, particularly for copper, with prices ending the year higher than where they started. Average prices for copper, aluminum and other nonferrous products were up approximately 10% year-over-year, with copper reaching multiyear highs for a brief period in late spring. Prices of PGM metals were the exception, down year-over-year by almost 10% due primarily to subdued auto production. From a supply flow perspective, compared to pre-pandemic levels, auto production remains low and financing costs for new and used cars are still comparatively high, both of which have contributed to the average age of vehicles reaching their highest level on record, resulting in lower scrappage rates of end-of-life vehicles.

We expect that continued reductions in U.S. interest rates along with the spending associated with the U.S. infrastructure bills will be major catalysts leading to higher manufacturing, construction and consumer activity and higher scrap flows.

Let's turn now to Slide 6 for an update on our strategic priorities and the longer-term outlook for recycled metals.

Our strategic priorities are directly aligned with the long-term trends we just reviewed and can be summarized as follows.

First, our cost reduction and productivity program.

This quarter, we achieved substantially the full quarterly run rate of benefits associated with our $70 million annual cost reduction and productivity improvement plan, which we announced earlier this fiscal year.

As part of our continued focus on optimizing production efficiencies, we anticipate achieving new benefits in fiscal '25 through the monetization of certain discrete real estate assets in locations where we can both substantially consolidate or reposition our business activity and unlock the associated real estate value.

Second, our investments in advanced metal recovery technologies. This is a multisite, multiyear investment program focused on increasing the recovery of nonferrous metals from our shredding process and creating product optionality by enabling us to create furnace-ready products based on demand and price. In fiscal '24, we achieved nearly 1/4 of the anticipated annual benefits. The majority of the returns from these investments should come through our results in fiscal '25. We estimate these investments should return over $40 million in annual EBITDA after full deployment.

Third, our trademark 3PR service and solutions business line.

Our 3PR service offering enables our customers to increase their recycling rates, reduce material going to landfills, lower their carbon footprint and provide enhanced sustainability reporting. This is an asset-light business, typically with multiyear contracts that can provide a counterbalance to our more cyclical core recycling operations and is highly aligned with secular growth trends. Reflecting steady growth, our 3PR business line is now contributing over 10% to our recycled metals volumes. And fourth, increasing our volumes. Despite the tight supply environment, we increased our sales of recycled metals in fiscal '24 compared to fiscal '23.

Our focus on commercial initiatives to increase our organic ferrous and nonferrous volumes gives us the opportunity to create operating leverage using the 1 million tons of capacity that we currently have available.

We are also investing in digital tools at our Pick-n-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 salvage auto parts remains solid.

While benefits from these initiatives are already contributing to our financial performance, their full positive effect on our operating margins is currently being masked by the impact of the headwinds we've been experiencing.

As these 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.

So now, let me turn the presentation over to Stefano.

Thank you, Tamara, and good morning. Consolidated adjusted EBITDA in the fourth quarter was $17 million compared to $9 million in the prior quarter, which had included $7 million in insurance recoveries. The biggest drivers of the improved results were higher sales volumes for all of our products, stronger nonferrous demand and prices, an expansion in recycled metal spreads and the ramp-up in benefits associated with our cost reduction and productivity program. Cost savings and productivity measures are critical levers within our control to mitigate operating margin pressure from the current market conditions and inflationary headwinds.

Our program reflects a number of structural initiatives that generate sustained benefits independent of changes in market conditions or volumes.

Our fiscal '24 program has benefits that aggregate to $70 million on an annualized basis, of which approximately 1/3 are savings resulting from a targeted 10% reduction of SG&A expense. 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.

Looking more specifically at SG&A expense. In the fourth quarter, adjusted SG&A costs were down 7% compared to the prior year, reflecting the benefits from the measures we implemented during the year.

However, those benefits were partially offset by elevated costs for certain ongoing legal matters in the fourth quarter, which we expect to be temporary and receded later in fiscal '25.

As part of our continuous improvement, we routinely review our operating platform and the locations in which we do business.

As Tamara mentioned, this process includes identifying opportunities to monetize certain discrete real estate assets while substantially repositioning the existing material flows to a nearby facility. These monetization opportunities do not involve meaningfully modifying our operating footprint. To date, we have executed two contracts to sell owned real estate properties and expect to generate net cash proceeds in excess of $35 million from these sales. We target closing of these transactions during the second half of fiscal '25, subject to customary terms.

Let's move to Slide 8 to discuss ferrous sales and the market dynamics. Ferrous sales volumes were up 12% sequentially, reflecting in equal part seasonality on flows of material and the focus on commercial initiatives as well as benefits from timing of shipments. The share of domestic ferrous shipments was 40%.

Our top sales destinations for ferrous exports were Bangladesh, Turkey and India. Benefiting from the seasonally higher flows and the above parity export prices, we were able to expand ferrous metal spreads sequentially, which together with operating leverage created by the increased process volumes resulted in higher contribution to performance in the quarter. The impact of average inventory accounting was a small detriment of $1 per ferrous ton in the fourth quarter compared to a detriment of $3 per ferrous ton in the prior quarter. Ferrous average net selling prices were substantially flat sequentially.

As Tamara mentioned, we continue to see pressure on the global scrap market from elevated levels of Chinese steel exports.

As the graph on the bottom right shows, in the first 9 months of calendar year '24, China's finished steel exports increased nearly 20% year-over-year and reached an 8-year high, impacting steel production and ferrous scrap demand, particularly in the Asian markets.

Now, let's move to Slide 9 to discuss nonferrous sales and provide an update on our nonferrous investments. Nonferrous sales volumes were up 13% sequentially, reflecting the benefits of seasonality on flows, higher production associated with our nonferrous recovery investments and timing of shipments. We sold our nonferrous products to 13 countries with the major export destinations being Malaysia, India and China. Average net selling prices for our recycled nonferrous products were up 4% sequentially on strong demand.

We continue to progress our investment in primary nonferrous recovery systems, which drive the incremental metal recovery and the majority of the expected contribution from these technologies. We further advanced our ramp-up activities on several of these primary systems during the quarter. We project completion of construction and start of ramp-up of the last of the currently permitted primary systems by the end of calendar year '24.  We have 2 primary systems left to start construction on the West Coast, which remains subject to permitting approval. Overall, the contribution to performance from these systems was positive in the fourth quarter.

We expect to see a trend of increasing returns from these investments in the remainder of calendar '24 and target full ramp-up of the permitted systems by early calendar '25. 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 10 to discuss our steel mill performance. Finished steel sales volumes of 140,000 tons in the fourth quarter were up 11% sequentially as we benefited from a solid pickup in seasonal construction activity. Average rolling mill utilization was 97%, up from 88% in the prior quarter and also well above the U.S. average of 78% for the period. Average net selling prices for finished steel were down 3% compared to the prior quarter. We believe our mill stands to benefit from the anticipated demand associated with the U.S. infrastructure builds.

Now, let's move to Slide 11. Operating cash flow for the fourth quarter was positive at $4 million, reflecting the higher EBITDA results sequentially. The impact on working capital of the higher volumes for all of our products created a detriment to net working capital in the quarter. The benefit to ferrous sales volumes from timing of shipments we saw in the quarter was offset by the timing of collection on bulk cargoes. Capital expenditures in the fourth quarter were $20 million.

For the full fiscal '24, CapEx was $76 million. This was a reduction of more than 1/3 compared to fiscal '23 as we align the level of our CapEx investments to current performance trends.

Looking ahead, we currently project our fiscal '25 CapEx investments to remain at similar levels and be approximately $80 million. Around 20% of this will be for growth projects, including investments to support the continued expansion of recycling services and completion of our nonferrous technology initiatives with the remaining spend for maintaining the business and environmental-related capital projects. Net debt was $409 million at the end of the fourth quarter.

Our credit facility has a capacity of $800 million and a maturity date of August 2027. Under our Credit Agreement, interest costs are linked to short-term market rates.

As a result, we benefit from short-term interest rate cuts by the U.S. Federal Reserve, such as the 50-basis points reduction that occurred in September. The effective tax rate for the fourth quarter was a benefit of 10% on reported pretax results, which reflected a true-up charge of $5 million to the valuation allowance on deferred tax assets driven by the goodwill impairment charge taken in the prior quarter. The tax rate on our non-GAAP results, which exclude the impairment charge and its related tax impact was a benefit of 33% in the fourth quarter.

Looking ahead, because of the significant estimates involved in the computation of the deferred tax valuation allowance position, we expect our tax rate to potentially be subject to quarter-to-quarter volatility in fiscal '25. We do not expect to be a cash taxpayer in fiscal '25, given the availability of net operating loss carryforwards. We pursue a balanced capital allocation focused on reinvesting in the business, supporting our strategic initiatives, returning capital to shareholders through our quarterly dividend, and maintaining a flexible balance sheet.

Looking ahead, we expect to experience typical first-quarter seasonality in our recycling and finished steel sales volumes. At this time in the quarter, uncertainties remain with respect to various market factors that can impact prices and flows, so it is too early to provide a first quarter quantitative outlook. And with that, I'll turn the call back over to Tamara.

Thank you, Stefano. I want to commend our team for not just waiting for the markets to improve, but for successfully focusing on the things that we can control.

Our results this quarter benefited from our significant cost savings and productivity improvement programs and our success in increasing ferrous, nonferrous, and finished steel sales volumes. 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, and stronger global manufacturing activity.

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 the decline in U.S. interest rates to help improve manufacturing and construction activity and benefit scrap supply flows. Improved scrap supply flows should provide us with significant operating leverage benefits as volumes recover. Independent of the timing of that recovery, our strategic initiatives, including investments in metal recovery technologies, expansion of our recycling services platform, and continued focus on productivity and cost control will position our company to benefit from both an improvement in market conditions and the structural tailwinds for recycled metals.

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 and support. In fiscal '24, we were certified for the fourth consecutive year as a Great Place to Work. This certification is a testament to the positive experiences of our employees and the strong workplace culture we have built together. And working together, we continue to demonstrate the critical and essential role of our business in our local economies and across the globe. And now, Victor, let's take some questions.

[Operator Instructions] Our first question will come from the line of Martin Englert from Seaport Research Partners.

Question on unit profitability improvement quarter-on-quarter. Is there any way that you can help parse out the sequential change in EBITDA, the volume contribution, price cost on a unit basis, and anything else? I know there was a component of reduced inventory holding losses, but the other components would be helpful to the extent that you can speak to it.

Hi, Martin, this is Stefano.

So when we think about the drivers of the $15 million sequential improvement in underlying EBITDA performance, so disregarding for a moment, the insurance reimbursements we recognized in the prior quarter.

In terms of sizing those drivers, I would say the individually largest component making up slightly less than half of that sequential result improvement is from the increase in volumes for all of our products, including the creation of operating leverage from those higher volumes.

The second component, I would say, is the ramp-up in cost savings and productivity benefits to the full quarterly run rate of our $70 million program. And that I would say makes up around 1/3 of the overall sequential improvement. And then the rest is from a combination of higher nonferrous prices due to the strong demand and the expansion of the recycled metal spreads, including what you mentioned, the lesser detriment from average inventory accounting compared to Q3.

Did you see any measurable change in the tightness on scrap flows during the quarter or since exiting? Or is this still kind of the same fundamental backdrop when it comes to flows?

We haven't seen any loosening. And, yes, supply flows are obviously impacted by seasonality.

So, right now, the changes in supply flows, any changes we see are really a function of seasonality than they are any benefits yet from interest rate reductions or any change in manufacturing or durable goods inventory levels or the like.

Can you provide a brief update what you're seeing as far as ferrous export activity and demand here in October and I guess, more recent history?

Sure. Well, as you can follow in the domestic market, the domestic prices increased by about $20 in October, which led to bringing domestic and export into parity. And that increase that occurred in the domestic October trade was the first time that we've seen an increase in calendar year '24. If we look at the East Coast export activity, deep sea ferrous scrap demand from Turkey has remained generally stable since the end of our Q4 amid tight availability in both the U.S. and Europe. And sentiment on the West Coast or off the West Coast export demand off the West Coast, the sentiment in the Asian steel and scrap vertical remains mixed as overall weak steel fundamentals and the high volumes of Chinese semi and finished steel exports continue to pressure that region. And I think that they are cautiously awaiting details of the impact of the Chinese stimulus on both Chinese steel production, Chinese export levels to see whether either production decreases or exports decrease because of higher absorption within the Chinese domestic market.

Our next question will come from the line of Samuel McKinney from KeyBanc Capital Markets.

Sticking in the ferrous volumes, and they were really a surprise to the upside in the fourth quarter, buoyed by those export numbers. But I understand supply was seasonally better during the summer months, but can you dig into the dynamics around the benefits from timing of shipments that you noted in the release?

Yes, I'll take that, Sam.

So, we said during the prepared remarks that the increase in ferrous was due more or less in equal part to that seasonality factor in the summer and the other half approximately was from the timing of shipments on the ferrous on bulk cargoes.

So, those would be the 2 components that drove that increase of 12% sequentially.

I guess what I'm asking is when you say benefits from timing of shipments, I mean, in the past, I know delayed cargoes have caused volumes to maybe seep into later quarters, but what were the benefits from the timing of shipments?

What I mean Sam, there was a reduction in inventory sequentially and that's the benefit from the timing of shipments.

As you know, timing of shipments, given the size of the cargoes can make a difference in our ferrous sales volumes. And in this current quarter, there was a reduction in inventory sequentially.

And then in nonferrous, I mean, you've cited the tight premium of twitch over zorba has made conversions sometimes less attractive. With zorba prices still sitting around $90 a pound, can you talk to us about how that premium has evolved in recent months and how you're viewing that market into the fiscal year '25?

Let me start Stef and then why don't you add? I think that auto production, a rebound recovery in auto production, which is still below pre-pandemic levels, is really weighing on twitch levels. And that compresses the spread between twitch and zorba.

One of the strategic reasons why we have made the metal recovery investments that we've had is to provide the product optionality that lets us access markets at different points in the, let's say, refinement of the metal process so that we can capture the highest profits.

So that spread, we anticipate widening as auto production recovers as the main driver. Stefano, you might want to dig in deeper to the specifics.

I agree, Tamara. And right, that product optionality allows us to basically process the material into higher value depending on the prices that we get on the sales.

So, if there is enough of a premium between those grades of material, we will process them or else we don't have to, we can sell, for example, our zorba product straight to export.

So that product optionality is important. And currently, we are not utilizing it because of the compressed spreads.

And then lastly for me, fourth quarter rebar and coil volumes improved solidly again off the third quarter that benefited from the solid seasonal pickup in West Coast nonres demand, think had some rain issues in the second quarter. But can you provide some more detail on the specific construction drivers that led to the fourth quarter volume uptick? Was it more that West Coast nonres demand?

Very much so. Yes, very much so. We still anticipate that the West Coast market will benefit and has yet to experience any real benefits from the infrastructure funds that are expected to flow probably mid-2025.

We continue to see bidding activity.

You can look at the Dodge Momentum Index. And year-over-year, it's significantly higher.

I think it's decreased a bit from August to September. But from a long-term perspective, we anticipate continued strong demand in the West Coast. And you can see our utilization rate at 97%  continues to be strong.

I'm not showing any further questions at this time. I would now like to turn it back over to Tamara Lundgren for closing remarks.

Thank you, Victor. Thank you, everyone, for your time today. We look forward to speaking with you again when we report our first quarter results in January. In the interim, stay safe and stay well.

Thank you for your participation in today's conference. This does conclude the program.

You may now disconnect. Everyone, have a great day.