Radius Recycling Q1 2025 Earnings Call Transcript

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Provided by Quartr
January 8, 2025

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Radius Recycling First Quarter 2025 Earnings Release Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your 1st speaker today, Michael Bennett, Investor Relations. Please go ahead.

Speaker 1

Thank you, Marvin, 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 Q1 of fiscal 2025. In addition to Terry's audio comments, we have issued our press release and posted a set of slides, both of which you can access on our website atradiusrecycling.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 Q, which will be filed later today.

Speaker 1

As we note on Slide 2, we may make forward looking statements on our call today. 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 Q. Please note that we will be discussing some non GAAP measures in our presentation today. We've included a reconciliation of those metrics to GAAP in the appendix to our slide presentation.

Speaker 1

Now let me turn the call over to Tamara Lundgren, our Chairman and Chief Executive Officer. She will host the call today with Stefano Gugini, our Chief Financial Officer.

Speaker 2

Thank you, Michael. Good morning, everyone, and welcome to our fiscal 'twenty five Q1 earnings call. On our call this morning, I'll review our quarterly results, the trends affecting our business and progress on the strategic activities we have underway to address industry dynamics and create long term value through the cycle. Stefano will then provide more detail on our financial performance, our capital investments and our capital structure. I'll wrap up with some takeaways from our sustainability report that we issued in mid December, and then we'll take your questions.

Speaker 2

But before we begin, I'd like to take a moment to express our support for those of you who are being impacted or who have family or friends who are being impacted by the wildfires in Southern California. Our thoughts and prayers are with you. Before turning to the next slide, I'd also like to take a moment to recognize our employees for their continued strong safety performance. After delivering safety results in fiscal 2024 that were the 2nd best in our company's history, this quarter the team achieved almost a 50% sequential reduction in our total case incident rate and 97% of our sites experienced 0 lost time injuries. These strong results reflect our team's engagement and commitment to creating a safe work environment and a sustainable safety culture.

Speaker 2

Let's turn now to Slide 4 to review our Q1 highlights. While market conditions during the quarter were more challenging than a year ago, Our year over year operating results remained stable. The difference between our adjusted EPS loss of $1.33 compared to a year ago was primarily due to an income tax detriment associated with our deferred tax assets. The contribution from our recycled metals business improved versus a year ago, driven by benefits realized from our cost reduction and productivity measures implemented in fiscal 2024 and stronger non ferrous demand, which offset the tight scrap environment and the softer global ferrous markets. The contribution from finished steel declined year over year due to weaker domestic steel conditions and a scheduled maintenance outage.

Speaker 2

Our steel mill utilization of 81%, while down sequentially, was still higher than the U. S. Average of 75%, reflecting relatively stronger West Coast demand. We achieved nearly breakeven operating cash flow during the quarter and returned capital to our shareholders through our 123rd consecutive quarterly dividend. The biggest headwind to our performance is the pressured U.

Speaker 2

S. Manufacturing sector, which has been in recessionary territory for 2 years. The last time we saw such an extended manufacturing downturn was over 20 years ago. The outlook for our manufacturing recovery, however, is positive, with U. S.

Speaker 2

Consumer and business confidence surging since November and a consensus across the political spectrum that revitalizing our manufacturing sector is critical for U. S. Economic growth and national security. Our recovery in the manufacturing sector should both ease the constrained scrap environment and drive more demand for ferrous and non ferrous recycled metals. From a long term perspective, the demand for recycled metals continues to have a strong upward bias underpinned by several structural trends.

Speaker 2

U. S. Industrial reshoring, continued growth in EAF steelmaking production, maximizing the use of recycled metals in production processes and the transition to metal intensive low carbon technologies. Importantly, our strategic initiatives focused on metal recovery technologies, volume growth and expansion of our 3PR services are strongly aligned with these secular growth drivers. So let's turn to Slide 5 for a deeper dive into market conditions.

Speaker 2

During the quarter, export prices for recycled ferrous metals decreased, driven by softer global steel demand, including the dampening effect from elevated levels of Chinese steel exports. In the last 12 months through November 2024, Chinese steel exports to countries in Asia, Central and South America and Turkey have risen by approximately 25% versus a year ago, reducing steel manufacturing and associated ferrous scrap demand in these regions as a result. Domestic ferrous scrap prices during Q1 were relatively flat sequentially, but down significantly from a year ago. Finished steel prices also softened during the quarter as purchasers reduced inventory levels heading into the end of the year. While the construction markets were softer due to interest rate uncertainty and inflationary pressures on construction costs, the Dodge Momentum Index, which is a 12 month leading indicator of non residential construction spending, is signaling strong growth.

Speaker 2

Moving to non ferrous. Although average non ferrous prices decreased sequentially, they remain up year over year on healthy global demand for copper and aluminum. 1 of the most significant drivers of change to our operating margins has been the reduced supply of recycled scrap metal. As the U. S.

Speaker 2

Manufacturing sector has gone through a cyclical downturn, our markets have experienced a tightening in the availability of end of life vehicles, obsolete white goods, manufacturing scrap and scrap from fewer construction and demolition projects. These constrained supply conditions have pressured purchase costs for raw materials, leading to margin compression. In addition, auto production that is still below pre pandemic levels, together with financing costs for new and used cars that are still comparatively high, have contributed to the average age of vehicles on the road reaching their highest level on record. But while the weaker environment that we're in today presents challenges, we've experienced cyclical downturns and volatility before, and we've demonstrated our ability to navigate effectively through these periods by focusing on what we can control, including productivity, customer service, technology and platform diversification. As market conditions recover, we are very well positioned to benefit from the expected increased demand for recycled metals associated with investments in infrastructure, industrial reshoring, growth in U.

Speaker 2

S. Electric arc furnace fuel making capacity and the transition to metal intensive low carbon technologies. So let's turn now to Slide 6 for an update on our strategic priorities. Our strategic initiatives are strongly aligned with the secular growth trends I mentioned earlier and can be summarized as follows. 1st, our investments in advanced metal recovery technology.

Speaker 2

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 should come through our results in fiscal 2025. We estimate these investments should return over $40,000,000 in annual EBITDA after full deployment. 2nd, our trademarked 3PR service and solutions business line. Our 3PR service and offering enables our customers to increase their recycling rates, reduce materials going to landfills, lower their carbon footprint and provide enhanced sustainability reporting.

Speaker 2

This is an asset light business, typically with multiyear contracts that provides a counterbalance to our more cyclical core recycling operations and it's highly aligned with secular growth trends. Reflecting this steady growth, our 3PR business line contributed over 10% to our recycled metals volumes in fiscal 2024. 3rd, our cost reduction and productivity program. In the Q1, we achieved a 6% reduction in adjusted SG and A costs compared to the prior year, reflecting the cost savings initiatives we implemented during fiscal 2024. Additionally, as part of our continued focus on optimizing production efficiencies, We expect in fiscal 2025 to benefit from the modernization 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.

Speaker 2

We expect to close on 2 transactions in the second half of the year and raise net proceeds of approximately $35,000,000 Benefits from these initiatives are already contributing to our financial performance. And as the manufacturing sector improves and the global steel market returns to equilibrium, we expect the benefits of our actions to become much more visible in our margins and EBITDA and to provide a substantial boost in future financial results. So now let me turn the presentation over to Stefano.

Speaker 3

Thank you, Tamara, and good morning. On a year over year basis, we were able to achieve stable operating results despite a deterioration in market conditions for ferrous and especially for finished steel over the last 12 months. In addition, last year's results had benefited from insurance recovery gains of $4,000,000 The contribution to consolidated results from our recycled metals platform improved over this period, driven primarily by stronger nonferrous demand and by the productivity and cost savings program we implemented over the last year with an aggregate quarterly run rate of benefits of nearly $20,000,000 This more than offset the impact of the softer global ferrous market. Finished steel contribution was significantly lower as weaker demand and prices led to a 10% compression in metal spreads year over year, which was further compounded by higher conversion costs due to lower mill utilization in the Q1 of fiscal 2025, including from a scheduled maintenance outage. On a sequential basis, there were 2 primary drivers of the decline in adjusted EBITDA performance.

Speaker 3

1st, slightly more than half of the reduction in EBITDA was associated with a decline in sales volumes, primarily due to seasonality and to a lesser extent timing of shipments. Ferrous and finished steel volumes each were down 11% and non ferrous volumes were down 14%. Lower volumes also contributed to margin compression through the loss of operating leverage, including at our mill due to the lower utilization. And second, there was a reduction in average net selling prices for our ferrous, nonferrous and finished steel products that led to metal spread compression compared to the Q4. The spread compression also included a detriment from volatility in nonferrous prices during the quarter.

Speaker 3

Adjusted SG and A expense was down 6% year over year, driven by the measures we implemented during fiscal 2024 targeting a reduction of 10% in SG and A. It is worth highlighting that our results in the Q1 reflect elevated cost of several $1,000,000 for certain ongoing legal matters, which we expect to be temporary and recede in the second half of fiscal twenty twenty five. Our reported SG and A expense was 10% lower year over year as it benefited from a $2,000,000 insurance recovery gain related to a legacy environmental matter, which is excluded from adjusted results. Turning to other ferrous dynamics in the Q1. The share of domestic ferrous shipments was 43%.

Speaker 3

Our top sales destinations for ferrous exports were Bangladesh, Turkey and India. Ferrous average net selling prices were 3% lower sequentially, primarily driven by weaker export demand amid continued pressure from elevated levels of Chinese steel exports. Domestic prices were stable during the Q1. In the lower price environment, the impact of average inventory accounting was a detriment of $1 per ferrous ton in the Q1, similar to the levels seen in the Q4. Now let's move to Slide 8 to discuss non ferrous sales and provide an update on our nonferrous investments.

Speaker 3

Nonferrous sales volumes were down 14% sequentially, primarily reflecting seasonality on flows and to a lesser extent timing of sales. On a year over year basis, volumes were down 2%. We sold our non ferrous products to 13 countries with the major export destinations being Malaysia, Thailand and India. Average net selling prices for our recycled nonferrous products were down 6% sequentially, reflecting the decline in nonferrous market prices from the multiyear peak reached earlier in the year. As you can see in the bottom right graph, price volatility for nonferrous metals was significant in the last 6 months.

Speaker 3

Notwithstanding the volatility, prices for nonferrous products remained at healthy levels as evidenced by the 12% rise in average net selling prices on a year over year basis. We continue to progress the deployment of our advanced primary non ferrous recovery systems, which drive the incremental metal recovery and the majority of the expected contribution from our investments in technology. We advanced our ramp up activities on several of these primary systems during the quarter. As of the end of the calendar year 2024, we have now completed construction and started the commissioning of the last of the currently permitted primary systems. Overall, the contribution to performance from these systems was positive in the Q1.

Speaker 3

We continue to expect to see a trend of increasing returns from these investments in the next couple of quarters and target the substantial full ramp up of the permitted systems by Q3 of fiscal 2025. Once fully operational, we continue to expect substantial returns from our investments of approximately $10 EBITDA per ferrous ton in normal market conditions. Now let's move to Slide 9 to discuss our steel mill performance. Finished steel sales volumes of 125,000 tons in the Q1 were down 11% sequentially due primarily to construction seasonality in our Western markets. Compared to the prior year, volumes were down 3%.

Speaker 3

Average rolling mill utilization was 81%, down from 97% sequentially and from 95% in the prior year, including due to the impact of a scheduled maintenance outage during the Q1 of fiscal 2025. Average net selling prices for finished steel were down by 2% sequentially and 7% year over year as demand in our West Coast market has softened in the elevated interest rate environment. We believe our mill will benefit from the anticipated demand associated with the U. S. Infrastructure bill.

Speaker 3

However, as of yet, this demand has yet to meaningfully come into play in the construction market. Now let's move to Slide 10. Operating cash flow for the Q1 was near breakeven, including a modest benefit from working capital from lower volumes and prices and the timing of shipments and collection. We continue to manage and align capital expenditures to current performance trends and invested $12,000,000 in CapEx in the Q1. Looking ahead, we now project our fiscal 2025 CapEx investments to be around $60,000,000 Around 20% of the spend will be for growth projects, including investments to support the continued expansion of recycling services and completion of our non ferrous technology initiatives, with the remaining spend for maintaining the business and environmental related capital projects.

Speaker 3

As Tamara mentioned, we expect asset monetization transactions with net proceeds of $35,000,000 to contribute to free cash flow generation in the second half of fiscal twenty twenty five, subject to customary closing terms. Net debt was $430,000,000 at the end of the Q1. Our credit facility with a capacity of $800,000,000 and a maturity date of August 2027 carries interest costs that are linked to short term market rates. As a result, we benefit from the cuts in short term interest rates by the U. S.

Speaker 3

Federal Reserve, which have aggregated to 100 basis points since September. The effective tax rate for the Q1 was an expense of 11% on reported pretax results. As mentioned during last quarter's earnings call, because we are in a valuation allowance position on our deferred tax balances and based on how the underlying mechanics work, our tax rate is subject to significant projection estimates during interim quarterly periods. Therefore, we expect to see meaningful quarter to quarter volatility in our tax rate due to changes in those estimates, including from company performance trends, which is what occurred in the Q1 and created a tax expense on a pretax loss. Compared to a year ago, the income tax rate drives the substantial majority of the difference in EPS results, as in the prior year, our tax rate reflected a more normal profile without the impact of a valuation allowance.

Speaker 3

We do not expect to be a cash taxpayer in fiscal 2025 given the availability of net operating loss carry forward. Looking ahead at the next few months, we expect to see typical winter seasonality in our recycling metals and finished steel sales volumes in our 2nd fiscal quarter before spring seasonality in both flows and construction activity kicks in. We also anticipate a meaningful ramp up in contribution from our technology investments and to continue to see the benefits from our productivity and cost reduction program, including an abatement of the currently elevated legal costs starting in the second half of the fiscal year. And with that, I'll turn the call back over to Tamara.

Speaker 2

Thank you, Stefano. In mid December, we issued our 11th sustainability report, which describes our progress towards our multiyear sustainability goals. I'll highlight just a few examples, and I encourage you to visit our website to view the report. We reduced our Scope 1 and 2 emissions at our recycling operations by 30% versus our 2019 baseline. In addition, we maintained 100 percent net carbon free electricity usage across our operations for the 4th consecutive year.

Speaker 2

We are 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. These achievements and many others would not have been possible without our employees living our core values of safety, sustainability and integrity. I'm very proud of what our team has accomplished. During a period marked by challenging market conditions and geopolitical uncertainties, our company's steady progress reflects the agility of our workforce, the resiliency of our culture and the strength of our platform. We have an exciting year ahead of us as we execute our strategic priorities and we are well positioned to benefit from the positive structural trends driving increased demand for recycled metals.

Speaker 2

I'd like to thank our employees for their dedication and our customers, suppliers and communities for their partnership. And now Marvin, let's open the call for questions. Thank

Operator

you. Our first question comes from the line of Samuel McKinley of KeyBanc Capital Markets. Your line is now open.

Speaker 4

Hi, Cameron, Stefano. Good morning.

Speaker 2

Good morning.

Speaker 3

Good morning.

Speaker 4

Hey, starting in the export market, the Q1 export fares pricing posted its softest quarterly level over the last handful of years. Can you talk about the elevated export levels still coming out of China? Any potential relief on that front? And what else you're seeing in the export market?

Speaker 2

Sure. So as you highlighted and as we mentioned, the Chinese steel overproduction has clearly had a dampening effect on markets around the world, in Asia, in Central and South America, in Turkey and elsewhere. What we expect is we do expect to see a pullback of this excess production and excess exports from China. We expect to see the pullback because other countries are going to push back on these cheap exports that hurt their domestic steel production. We've seen this dynamic before and we have seen how quickly it can turn.

Speaker 2

So we are anticipating a correction. We can't give you the time, but we do anticipate a correction.

Speaker 4

Okay. And then my next question would be on interest expense. 1st quarter interest expense was relatively flattish sequentially, but that number rose about $4,000,000 year over year. I know a recent amendment to the credit facility has increased your cost of money, but any info you can give us on how you plan to manage the debt and that rising interest expense moving forward?

Speaker 3

Hi, Sam. This is Stefano. So on the first part of your question, the impact of the cost of the amendment to the credit facility that we executed back in June is now fully reflected in our interest cost profile in Q1 2025. Those were one time costs that were paid in cash at the time of execution of the amendment. From an accounting perspective, they are amortized interest expense of the remaining lapse for the facility, which expires in August 27.

Speaker 3

So at this point, those costs that flow through interest expense are non cash and they were not material to start with. On the second part of your question, obviously, I mentioned in my prepared remarks, the interest rates decline that we have seen with a reduction of over of 100 basis points since the Fed started cutting the rates back in September. That does and will benefit our interest costs since we our line of credit is based on short term interest rates. And because of the timing of when those reduction occurred, the benefits are only very partially reflected in our fiscal Q1 and will be therefore reflected in full in Q2. And overall, from a debt perspective, we have a line of credit.

Speaker 3

We have capacity of $800,000,000 We have $430,000,000 at the end of Q1 outstanding. And really, that level of debt is also reflective of the investments we made in the last couple of years and including on a nonperage recovery technologies. But we now expect, as Tamara mentioned and I mentioned, we expect those returns to expand and have strong payback. So we view our liquidity from a positive perspective. The path that we're looking forward is clearly improving the financial performance and operating cash flow generation through self help initiatives or strategic initiatives and as Tamara just mentioned, expecting market conditions to recovery as well.

Speaker 3

So those are the catalysts. We have managed and aligned our CapEx and flexed the CapEx to align with cash flow generation. We expect $60,000,000 in CapEx spend in FY 2025. We have asset monetization opportunities. We already have 2 properties under contract with expected cash proceeds of $35,000,000 Those will be supportive of free cash flow generation and interest costs also going lower.

Speaker 3

So from that perspective, that's the context on the debt and interest costs.

Speaker 4

Okay. Thank you.

Speaker 3

Thank you.

Speaker 2

Thank you.

Operator

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Tamara Lundgren for closing remarks.

Speaker 2

Thank you, Marvin, and thank you all for your time today. We look forward to speaking with you again when we report our Q2 results in April. In the interim, stay safe and stay well.

Operator

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

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Radius Recycling Q1 2025
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