Schnitzer Steel Industries, Inc.
Q4 2021 Earnings Call Transcript

Published: 21 Oct 2021

[Operator:]

Thank you for standing by and welcome to the Schnitzer Steel Fourth Quarter 2021 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. 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.

[Michael Bennett:]

Thank you and good morning Jonathan. 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 2021. 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 or schn.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 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 statements 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 Richard Peach, our Chief Financial Officer and Chief Strategy Officer.

[Tamara Lundgren:]

Thank you, Michael. Good morning everyone and welcome to our fiscal 2021 fourth quarter earnings call. We appreciate your interest in our company and we look forward to sharing our results with you this morning. The results that we will discuss today are Schnitzer's best operating results in a decade. 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. I'd like to congratulate our employees on their fiscal 2021 operating and financial achievements and to thank them for their extraordinary efforts over the past 18 months. Many of you are listening to this call today. Our success is the direct result of how you've 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 and full year financial results and the market and macroeconomic trends affecting our business. I'll also provide an update on our strategic activities. Richard 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. I'm pleased to be able to share with you that fiscal 2021 was the safest year recorded in our company's 116-year history. As you can see on this slide, this is our third consecutive year of achieving an historical best in our TCIR results and also a record year in our LTIR results a testament to our team's commitment to safety training, hazard awareness, and continuous improvement that even in the face of all the disruptions this year, 93% of our facilities did not experience a lost-time injury. We've made excellent progress in identifying and addressing potential hazards before they become injuries. While we still have work to do, our team's commitment to safety is clearly evident in these results. Thanks go to the entire Schnitzer organization for their dedication to creating a safe work environment and a sustainable safety culture. Now, let's turn to slide five. Sustainability is at the core of what we do and how we operate and has been since our founding in 1906. As one of North America's largest metal recyclers, Schnitzer facilities acquire process and recycle over 4.4 million tons of ferrous metal and about 600 million pounds of non-ferrous metal annually. The material we recover and recycle represents increasingly critical feedstock for industries and infrastructure that need high-quality low-carbon metal solutions to fuel the transition to a sustainable future. In addition, our Oregon steel mill is one of the very few whose primary energy source comes from hydroelectricity. Combined with the use of recycled metal as its primary raw material, the steel made in our electric arc furnace has an exceptionally low-carbon impact as compared to the industry average. We expect to publish our eighth annual sustainability report in the coming weeks. But I'd like to take a moment to highlight a few examples of the significant progress we made this year against our goals, which are centered on our sustainability framework of people, planet and profit. In addition to our safety performance, which I just described on the preceding slide, in fiscal 2021, we became certified as a Great Place to Work. We believe employee engagement including initiatives focused on diversity equity inclusion volunteering and job satisfaction contributes significantly to our operational performance, the achievement of our strategic goals and the growth and development of our employees. We are also well on our way to achieving our commitment to reduce greenhouse gas emissions at our recycling operations by 25% by fiscal 2025 against our 2019 baseline. We've also committed to achieving 100% net carbon free electricity use by fiscal 2022. We're meeting these goals primarily through significant investments in state-of-the-art emissions control systems for our metal shredding operations and the replacement of operating equipment with newer lower emission models. Our upcoming sustainability report will provide more details regarding 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 engaged and inclusive workplace; and how we give back to the communities where we operate. So now let's turn to slide 6 to review our financial results. Earlier this morning, we announced our fiscal 2021 fourth quarter adjusted earnings per share of $1.81, a significant year-over-year increase and our best fourth quarter since fiscal 2011. Our full year adjusted EPS of $6.13 was our best since fiscal 2008. The quarter was impacted by the dampening economic effects of the COVID-19 Delta variant, supply chain issues and labor shortages. However, we continued to strengthen our core operations through productivity initiatives. We progressed our strategic investments in advanced metal recovery technologies and we increased our sales volumes. Our Q4 adjusted EBITDA per ferrous ton was $69, far exceeding the $27 per ton a year ago. Our margins benefited from robust global demand for recycled metals with average net selling prices reaching multiyear highs. Our ferrous and non-ferrous sales volumes also increased versus Q4 of last year, even though both were adversely impacted by logistics constraints. Due to the fire that occurred in our steel mill in mid-May, our finished steel sales volumes and rolling mill utilization were down significantly. However, by mid-August, several weeks ahead of schedule, we began ramping up mill operations and accepting orders for our full range of finished steel products. We delivered one of our strongest quarters of operating cash flow, which enabled us to reduce our debt to its lowest level since 2005, while continuing to return capital to shareholders through our 110th consecutive quarterly dividend and to invest in our strategic initiatives to deliver growth. Let's turn now to slide 7 for a review of our full year fiscal 2021 results. As you can see on this slide, our team delivered outstanding financial and operational performance in fiscal 2021. The year-over-year comparison is particularly strong, reflecting the initial adverse impact of the COVID-19 pandemic in fiscal 2020. But our fiscal 2021 performance against five-year average trends also shows significant strengthening, reflecting the benefits from the execution of our multiyear productivity initiatives; the implementation of our One Schnitzer operating platform; the operating leverage from higher sales volumes and strong working capital management which led to our highest operating cash flow since fiscal 2012. Also important to note is our return on capital employed. Our fiscal 2021 adjusted ROCE of almost 21% is our highest in over a decade, reflecting higher profitability, driven by increased volumes, improved productivity, and positive market conditions. Let's turn now to slide eight for a review of pricing trends for recycled metals and finished steel products. As you can see on this slide, while weaker than in Q3 market prices for ferrous scrap during Q4 remained near multi-year highs. These favorable pricing levels are supported by cyclical and structural trends including the post-pandemic economic recovery and the global focus on decarbonization. Export sales off the East Coast were broad-based during the quarter. The downward trend in market prices that we saw in August was largely due to a slowdown in demand from construction activity in Turkey and higher freight rates to Asia. This has leveled off and recent reported prices to Turkey have strengthened. Turkey remains the largest importer of US ferrous scrap metal. Prices for export sales off the West Coast during the quarter trended similarly to the East Coast with a dip in August, driven by lower steel prices, lower billet and scrap import demand from China, and higher freight costs. Prices have also rebounded since the end of the quarter. On the domestic front, ferrous scrap demand and prices remained high as steel capacity utilization reached 84% exceeding pre-pandemic levels. Copper and aluminum scrap prices traded at or near multiyear highs, benefiting from tight supplies, shipping constraints, and deployment of low-carbon technologies. Zorba which was trading as low as $0.34 per pound last year has more than doubled in price. Prices for PGM metals, however, fell during the quarter, primarily due to reduced auto production and higher supply flows. Finished steel prices and demand continued to increase reaching their highest level since 2008 and as we return to full operations at our steel mill, we expect demand for our finished steel products to remain strong. So, let's turn now to slide nine to discuss some of the longer term demand trends for recycled products and services. Decarbonization is a powerful structural driver of demand for recycled metals. Investment in infrastructure to support the UN Sustainable Development Goals for clean energy, clean water, and industrial infrastructure has been estimated to run into the trillions of dollars. Increasing the use of recycled metals in these new product and infrastructure investments is a great example of how old economy tools will lead the way to decarbonization of the new economy. A low-carbon economy and many low-carbon technologies are widely acknowledged to be more metal-intensive. Recycled metals require less carbon to produce than mined metals. The use of recycled metals is now 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 reducing material going to landfills. We can see how some of these trends have translated into higher ferrous scrap metal usage in the US 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 US and globally and is projected to increase even further. And scrap usage in China steelmaking is expected to increase by up to 50% by 2025, driven by EAF replacement capacity as well as by the increased use of scrap in their BOFs. Let's turn now to slide 10 to review the strategic actions we have underway which are aligned with these long-cycle trends. Decarbonization trends, customer demand, product optionality, productivity, and volume growth underpin our strategic initiatives. Extracting more non-ferrous metals from our shredding activities is a significant value-added process and is directly aligned with global demand trends. During the quarter, we ramped up production on two of our new advanced metal recovery systems in California and in Georgia with the remaining systems on track for commissioning by the end of the third quarter of fiscal 2022. We expect the benefits from these projects to be substantial and to increase our non-ferrous volumes and revenues, lower our operating costs, and improve our margins, expand our product offerings and customer base, and support our sustainability objectives of increasing recycling and reducing waste. We also made significant progress this quarter on our objective of increasing our volumes when we closed on the acquisition of eight metals recycling facilities from Columbus Recycling, a leading provider of ferrous and non-ferrous recycled metal products and services in the southeastern US. The Southeast is a region expected to see a significant increase in EAF steelmaking capacity in the coming years. Combined with our existing facilities, this acquisition increases our footprint to 22 operating facilities in the Southeast and 102 across North America. This acquisition is expected to increase our annual ferrous sales volumes by about 7%, expand our platform and offerings in a robust regional market with meaningful synergies and is consistent with our growth strategy to expand metals recycling operations to meet anticipated increases in steel and non-ferrous metals demand. We're excited to welcome the Columbus Recycling team to Schnitzer as both our organizations have fostered cultures focused on operating responsibly and sustainably for their customers and the communities in which they operate. So now let me turn it over to Richard for a more detailed review of each projects and our financial performance.

[Richard Peach:]

Thank you Tamara, and good morning. I'll begin with additional information on our Columbus acquisition. After announcing the deal in August, the transaction closed on October 1. The cash purchase price was $107 million subject to adjustments for acquired working capital. Using our results for fiscal 2021 as a baseline, adding the eight Columbus facilities is expected to initially increase our annual adjusted EBITDA and ferrous and non-ferrous sales volumes each by approximately 7%. Columbus has annual ferrous volumes of approximately 300,000 tons of which around 40% is prime and annual non-ferrous volumes of approximately 40 million pounds. Now let's turn to slide 12 to discuss our major technology initiative. We are in the process of implementing advanced metal recovery technologies in several of our major facilities. Once all our new systems become fully operational we expect nonferrous volumes recovered from shredding to increase by 20% or 50 million pounds per annum. We also aim to create more furnace-ready products and to increase product optionality, including the capability to convert our Zorba product into higher-value base metals such as twitch. Now let's turn to slide 13 to discuss status and our total investment. The new technologies can be described in three categories

[Tamara Lundgren:]

Thank you, Richard. The operational and financial results we announced this morning, as well as our full year fiscal 2021 results, reflect the agility of our team, the strength of our culture and the resiliency of our platform. As we move forward in fiscal 2022, our investments in advanced metal recovery technologies and in the expansion of our Southeast region 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 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 continued growth in US and global EAF steelmaking capacity, the global focus on decarbonization and the increased metal intensity of low-carbon technologies. In closing, I'd like to thank our employees once again for their outstanding performance. They have demonstrated why we have continued to be a leader in the recycling industry for over a century. And now operator let's open the call for questions.

[Operator:]

Our first question comes from the line of Emily Chang from Goldman Sachs. Your question, please.

[Tamara Lundgren:]

Good morning.

[Emily Chang:]

Good morning, Tamara and Richard. My first question is just around some of the ferrous shipment movements that we saw during the quarter. It looked like domestic shipments were a little bit lighter but export volumes were higher. Could you just sort of talk through what you're seeing there and maybe the demand in both domestic and export markets looking into the next year please?

[Michael Bennett:]

Rich, why don't you start?

[Richard Peach:]

I'll start Emily. Good morning. The fourth quarter export volumes were up sequentially as you mentioned. And the reason for that was that we were not sending scrap to our steel mill during the fourth quarter because of the production outage related to the fire. So that scrap was exported instead and that's why the main reason why export volumes were up sequentially.

[Tamara Lundgren:]

And generally on demand outlook Emily we continue to see it as very strong for all of the reasons that I mentioned in our prepared remarks, which is the decarbonization trend which we consider to be a long-cycle trend; as well as the economic recovery from the pandemic.

[Emily Chang:]

Great. That's very helpful. I'll leave it at that for now. Thanks.

[Tamara Lundgren:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Michael Leshock from KeyBanc Capital Markets. Your question, please.

[Michael Leshock:]

Hey, good morning.

[Tamara Lundgren:]

Good morning.

[Michael Leshock:]

First I just wanted to ask on Zorba. Domestic pricing is much weaker than international. What are the dynamics that are driving that price gap? And when should we expect or why should we expect domestic and international Zorba prices to converge?

[Tamara Lundgren:]

So let me start by again just talking about general demand trends and what is driving the increase that we've seen even on a year-over-year basis from last year when Zorba prices were in the mid-30s to where they're more than double now. And it's really the long-term, the long cycle trends of decarbonization, the need for copper, the need for aluminum around the world as we all transition to low-carbon technologies. Between domestic and export demand, we always see movements, whether it's ferrous or non-ferrous. And yet as the underlying economics are so strong, they tend to converge over time. So we tend – you will see the differentials you see it on the ferrous markets as well. But they generally tend to move directionally consistently and they tend to converge.

[Michael Leshock:]

Okay. And then on the Columbus acquisition, I appreciate the details you gave there. Could you talk to your strategy behind those assets more broadly? And is there any way to frame the cadence of your accretion expectations as we look forward into 2022?

[Tamara Lundgren:]

So on the strategic rationale for the acquisition it really lines up with what we have said before, which is looking at metals recycling additions in those regions and areas and with respect to those products where we anticipate seeing strong demand. In the Southeast, that is the region of the US, where we've been quite successful in growing our business over the past 12 or so years. And we're seeing clearly that's where most of the new EAF steelmaking capacity is coming online. So it was very well aligned with the macro trends. It's a company that we knew well and that operates with similar principles as we operate. So we see the synergies to be meaningful to be material, and we see the growth outlook to be quite strong.

[Richard Peach:]

And Michael, it's Richard. On the accretion front, as we said in our prepared remarks, we would expect an initial EBITDA improvement from Columbus representing around 7% of Schnitzer's FY 2021 EBITDA, which as you know for Schnitzer for FY 2021 was $289 million. We'd expect about a 7% improvement on that initially from the acquisition of Columbus.

[Michael Leshock:]

So is that instant, or is that for the full year 2022, you're talking about that 7%?

[Richard Peach:]

Yes that's an annual number, an annual 7% improvement initially.

[Michael Leshock:]

Okay. And how should we think about that 7% as the year progresses? Is that something that will be more of a linear ramp to get there?

[Richard Peach:]

Yes, I think so. I think you could think of it that way, yes.

[Michael Leshock:]

Okay. And then just lastly for me. I just wanted to get your take on the inventory build. If there's any way you could frame the potential magnitude there in 1Q given the replenishment needed inventory there? And is that a one quarter thing, or is that something that might take several quarters to build back?

[Richard Peach:]

I mean, I think there Michael, as we said, we're expecting to be approaching an 80% utilization at the steel mill in Q1 and for our volumes to be significantly higher sequentially. So the ramp-up is going very well. And as the market is so strong, we can sell everything that we're producing. So we would expect further strong progress in the first quarter and into the second quarter where we rebuild those inventories.

[Michael Leshock:]

All right. Appreciate the details. Thanks guys.

[Tamara Lundgren:]

Thank you.

[Richard Peach:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Gus Richard from Northland. Your question please.

[Gus Richard:]

Yes. Thanks for taking my question.

[Tamara Lundgren:]

Good morning, Gus.

[Gus Richard:]

Good morning. Thank you. I just was curious. In the last quarter, what was the mix of prime ferrous versus secondary?

[Richard Peach:]

Well, we -- that's not numbers that we do disclose, but prime overall is a minority of our overall total of ferrous scrap.

[Gus Richard:]

Is it similar to Columbus?

[Richard Peach:]

Overall, in terms of the average for Schnitzer as a whole, it's less than the 40% that we're seeing at Columbus that we're getting there.

[Gus Richard:]

Got it. That's helpful. And then if you could just provide a little bit of color which includes, but ferrous processing and had to have an impact on the scrap market domestically. And I was just wondering have there been any ramifications post that announcement?

[Tamara Lundgren:]

No ramifications that we're aware of.

[Gus Richard:]

Okay. It hasn't tightened the market at all or.

[Tamara Lundgren:]

No. Zorba processing is in the Midwest and that's a region where we're not really active. But we've certainly not seen anything on a national basis.

[Gus Richard:]

Got it. Okay. Very helpful. Thank you so much.

[Tamara Lundgren:]

Thank you.

[Operator:]

Thank you. 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.

[Tamara Lundgren:]

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

[Operator:]

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.