Q4 2023 Schnitzer Steel Industries Inc Earnings Call
Participants
Michael Bennett; VP of IR; Schnitzer Steel Industries, Inc.
Stefano R. Gaggini; Senior VP & CFO; Schnitzer Steel Industries, Inc.
Tamara L. Lundgren; Chairman, President & CEO; Schnitzer Steel Industries, Inc.
Samuel J. McKinney; Analyst; KeyBanc Capital Markets Inc., Research Division
Presentation
Operator
Good day, ladies and gentlemen, thank you for standing by. Welcome to the Radius Recycling's Fourth Quarter 2023 Earnings Release Call and Webcast. (Operator Instructions) Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Michael Bennett of Investor Relations. Please go ahead.
Michael Bennett
Thank you, Olivia, and good morning. I'm Michael Bennett, the company's Vice President of Investor Relations. I am happy to welcome you to Radius Recycling's earnings presentation for the fourth quarter of fiscal 2023. 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 statement 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 have 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, Chairman and Chief Executive Officer. She will host the call today with Stefano Gaggini, our Chief Financial Officer.
Tamara L. Lundgren
Thank you, Michael. Good morning, everyone, and welcome to our fiscal '23 fourth quarter earnings call. On our call this morning, I'll discuss our recent rebranding, review our quarterly and full year financial results, the trends affecting our business and project 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, and then we'll take your questions.
Before we begin our review, I'd like to recognize our team for their unwavering commitment to safety. The health and safety of our employees and all who work at and visit our sites is paramount. In fiscal '23, almost 90% of our facilities were free of any lost time injuries. While we still have work to do, our team is dedicated to continuing their progress in identifying and addressing potential hazards before they become injuries to ensure a safe working environment for everyone. So let's turn now to Slide 4 to get started.
In July, we announced the launch of our new corporate name and logo, Radius Recycling. This is an exciting new step in our company's history. Over the last 118 years, we've operated under many names from our humble beginnings in 1906 through over 50 acquisitions. Today, we operate in more than 100 communities across North America, employing over 3,300 talented individuals. The rising demand for ferrous and nonferrous metals continues to propel our company forward. The name Radius Recycling, reflects our company's global leadership in metals recycling and conveys our work, our purpose and our vision for a sustainable future. Like the radius of a circle, our work sits at the center of the circular economy, seamlessly connecting all points towards a low-carbon future. And while metals recycling and steel manufacturing represent the foundation of our business, we are not the company we were a century ago.
Our reach now extends far beyond what the name Schnitzer Steel implied. And it's important for us to really communicate our role in the circular economy and the value we deliver in the communities in which we operate. And while our name is changing, our commitment to our core values of safety, sustainability and integrity remains steadfast. And those SSI initials will continue to serve as a reminder of our historic legacy. So let's turn now to Slide 5 to review our fourth quarter highlights.
Earlier this morning, we announced our fourth quarter results, which reflected adjusted EPS of $0.47 and adjusted EBITDA of $49 million, which included material insurance recoveries. Our underlying performance reflected market conditions for recycled metals which significantly weakened during the quarter on lower global steel demand. Sequentially, average net selling prices for recycled metals decreased, which, in combination with the further tightening of supply flows over the summer, led to significant metal spread compression in the quarter, lower ferrous and nonferrous sales volumes and an adverse impact from average inventory accounting. These effects were substantially offset by the recognition of insurance recoveries. We generated strong operating cash flow and used free cash flow of over $100 million to reduce debt. We also continued our uninterrupted record of returning capital to our shareholders through the issuance of our 118th consecutive quarterly dividend. Let's turn now to Slide 6 to review our fiscal '23 highlights.
I'm proud of the performance our team achieved in fiscal '23. During the year characterized by weaker market conditions, our focus on our strategic initiatives delivered positive benefits. Our nonferrous sales volumes increased by 7.5% year-over-year, reflecting initial contributions from our investments in advanced metal recovery technologies. In addition, we expanded our platform and services. Last November, we acquired ScrapSource, an asset-light business that significantly scales our national sourcing platform and enhances our recycling services offerings, both of which are now integrated under our trademark 3PR brand.
Our 3PR services help our customers to increase their recycling rates, reduce material going to landfill, improve their carbon footprint and enhance their sustainability reporting. During the fiscal year, we also successfully implemented $60 million in annual productivity initiatives focused on production cost reductions, operating efficiencies and SG&A savings. These initiatives helped to mitigate inflationary and other cost pressures. In fiscal '23, we achieved full year operating cash flows of $139 million, demonstrating our consistent ability to generate cash flow through the cycle. Our free cash flow was also positive for the year. And last, I'm delighted to share that our company for the third consecutive year, earned Great Place To Work towards certification. This certification recognizes companies that value employee credibility, trust, respect, pride and comradery and is a testament to the positive experiences of our employees and the strong workplace culture we have built together. Let's turn now to Slide 7 for a review of market conditions.
One of the most significant drivers of change to our operating margins during fiscal '23, including the fourth quarter, has been the reduced supply of recycled scrap metal. As the U.S. economy slows, our markets are experiencing a tightening in the availability of end-of-life automobiles, obsolete white goods, and scrap from reduced manufacturing activity and construction and demolition projects. These constrained supply conditions have pressured purchase costs for raw materials, leading to margin compression. As the charts on this slide demonstrate U.S. PMI has dropped below pre-COVID levels. The availability of end-of-life vehicles has also decreased as the average age of vehicles on the road has reached its highest level on record. Lower durable goods orders, along with increased scraps collection costs have also contributed to tighter scrap flows. By focusing on what we can control, including customer service, technology and platform expansion, our nonferrous volumes increased by over 7% in fiscal '23, and we were able to limit our ferrous sales volume decline to about 5%. And unlike previous periods with similar market conditions, we expect the long-term structural benefits related to decarbonization to provide further upside when the market strengthens. Let's turn now to Slide 8 to review market prices in more detail.
As the chart in the upper left corner of this slide indicates ferrous export prices softened during the quarter due to slowing global economy and corresponding weaker global steel demand. Chinese steel exports have also increased meaningfully over the last 12 months as their domestic demand, especially for construction activities has fallen. Chinese exports have reached their highest levels since fiscal 2016 and are leading to slower global steel production ex China. In the U.S., ferrous market prices fell by 15% during the quarter as steel mill utilization rates fell and uncertainty regarding the UAW strike has led to some destocking.
Turning to nonferrous. As the chart in the top right corner of this slide shows, during Q4, base metal prices were mixed with copper improving due to low global inventories and aluminum falling on weaker Chinese domestic demand and lower energy prices.
Turning to finished steel. While we are seeing a bit of softening due to the level of interest rates and tighter credit conditions, we expect to see increased activity in 2024 and beyond related to the U.S. infrastructure bills. While activity supported by these bills has been very limited thus far, data tracking shows that the pipeline of projects in the predesign and design phases is growing. Our Oregon steel mill with its range of low-carbon long products is very well positioned to meet this expected demand. For example, last month, Oregon passed a bill requiring the Oregon Departments of Transportation and Administrative Services to prioritize domestically manufactured iron and steel in public works and public improvement, transportation and vertical construction projects. The bill complements Oregon's previously enacted by clean law aimed at procuring low-carbon construction materials like our net zero carbon emission green steel products. Let's turn now to Slide 9 to review the longer-term outlook for recycled metals.
As we have emphasized during previous earnings calls, decarbonization is a powerful driver of demand for recycled metals, which require less carbon to produce than mined metals. As you can see from the chart in the top left corner of this slide, many low carbon technologies are widely acknowledged to be more metal intensive than the technologies they are replacing. As a result, the long-term demand for recycled metals remains very positive and is further supported by the anticipated structural deficits for metals, such as copper and nickel and the increased demand for manufacturers to maximize their use of recycled materials and reduce the environmental impact of their activities. And as you can see in the 2 charts on the bottom of this slide, the use of ferrous scrap in the steelmaking process is also expected to continue to grow in the coming years as electric arc furnace steelmaking capacity, which uses scrap -- ferrous scrap as its primary raw material has been expanding and is projected to increase further. Let's turn now to Slide 10 for an update on our strategic priorities.
In an economic environment characterized by market volatility and inflationary pressures, we continue to be focused on managing the things within our control. Our strategic priorities are directly aligned with the long-term trends of decarbonization and the corresponding need for more recycled metals and can be summarized as follows: first, technology investments in advanced metal recovery systems that are major recycling operation, as Stefano will describe in more detail, 11 of the 13 new systems are now operational or in commissioning. Second, volume growth. Even in the current challenging market conditions, we remain highly focused on increasing our ferrous and nonferrous volumes. Third, expansion of our products and services to meet the increasing demand for recycled metals. We continue to focus on providing products and services that meet this demand such as our green steel products and our 3PR services. And fourth, productivity initiatives that we undertake as part of our continuous improvement culture. In fiscal '23, we achieved the full run rate of benefits from the productivity initiatives that we announced earlier in this fiscal year. For fiscal '24, we have launched a new $30 million productivity improvement program.
Before turning it over to Stefano, it's worth noting that while the weaker environment that we are in today presents challenges, we have experienced cyclical downturns and volatility before and have demonstrated our ability to navigate effectively through these periods. We have a strong track record of delivering positive through-the-cycle operating cash flows and have a flexible balance sheet. Equally as important, we benefit from an operating platform where the majority of our costs are variable, and we have multiple levers available to us to manage through this period of slowing economic activity and tighter supply flows. These market conditions won't last forever, and we are well positioned to benefit from the expected increased demand for recycled metals associated with decarbonization and low-carbon technologies.
So now let me turn it over to Stefano.
Stefano R. Gaggini
Thank you, Tamara, and good morning. I'll put a review of our consolidated results and provide an update on our ferrous sales and the market dynamics. Adjusted EBITDA in the fourth quarter was $49 million or $44 per ferrous ton. Average ferrous and nonferrous net selling prices were lower sequentially by 14% and 7%, respectively. In addition to lower prices, metal spread compression was exacerbated by the further tightening of scrap flows since June, which affected our ability to adjust scrap purchase prices to reflect the decline in selling prices in the quarter. Slower-than-expected scrap generation also led to a sequential decline of ferrous sales volumes of 4% and a loss of operating leverage. The lower price environment led to a detriment from average inventory accounting of $5 million or $5 per ferrous ton. Finished steel sales volumes were 7% higher sequentially, benefiting from seasonality, which substantially offset the impact of lower finished steel net selling prices.
Our fourth quarter results included the recognition of insurance recoveries of $41 million, representing final settlement with our insurers during the quarter for losses resulting from the fire at our steel mill in fiscal '21 as well as recoveries related to the shredder outage at our Everett facility last year. As a reminder, we experienced the financial impact from the operational disruptions associated with these events in the last couple of years, including earlier in our fiscal '23, we did not exclude the impact from our adjusted EBITDA and consistent with that approach, we do not adjust out insurance recoveries when they are recognized in our income statement. Finding ways to mitigate increases in operating costs resulting from inflation remains a priority.
As Tamara mentioned, today, we are announcing additional productivity initiatives for fiscal '24, targeting benefits of $30 million on an annual basis. These initiatives are focused primarily on further production cost reductions, operating efficiencies, logistics, procurement savings and yield improvements. We have already started implementing these measures which aim to not only mitigate inflationary pressure on operating costs, but also offset the loss of operating leverage due to the lower volumes we are seeing in the current environment. In the fourth quarter, we recognized noncash impairment charges of $45 million, primarily related to goodwill associated with one of the company's reporting units as part of the annual test required by the accounting standards. These noncash charges are adjusted out of our non-GAAP financial measures.
Turning to other ferrous dynamics in the quarter. The share of domestic ferrous shipments was 48%, and our top sales destinations for ferrous exports were Bangladesh, Turkey and India.
Now let's move to Slide 12 for an update on nonferrous sales and the market dynamics. Average net selling prices for copper, aluminum and other nonferrous products were down 7% sequentially, reflecting the decline in market prices since the spring. Lower generation of nonferrous scrap also contributed to margin pressure. Prices of PGM metals continued to decline significantly, with average net selling prices down 19% sequentially and almost 50% from a year ago, impacted by lower demand from the U.S. and global auto industry. Nonferrous sales volumes remained at similar levels sequentially. We sold our nonferrous products to 12 countries with the major export destinations being India, Malaysia and China. Our product mix is highly diversified with sales of products recovered from shredding operations reaching around half of total nonferrous volumes. Now let's move to Slide 13 to provide an update on our technology investments.
We continue the deployment of our technology program focused on increasing metal recovery of nonferrous material, generating more furnace-ready higher-value products and creating product optionality. We expect the remaining capital expenditures to complete these investments to be less than $5 million. Once fully operational, we expect these technologies to increase nonferrous volumes to recover from shredding of operations by at least 20%. As shown in the slide, our initiative comprises 13 systems in total. Of these, 6 are advanced separation systems, all of which are now operational. We're also implementing 7 primary nonferrous systems for the recovery of aluminum and copper which are the main drivers of the projected increase in recovery volumes and incremental profitability. During the quarter, we began commissioning on the West Coast of one of these primary recovery systems, bringing to 5 the number of those that are either operational or in various stages of commissioning and ramp-up. There remain 2 major copper recovery systems to construct on the West Coast to complete our program. One of these systems continues to await permitting approval with construction on the other now projected to start by around the end of the calendar year. As a result, we now target start of commissioning of these 2 remaining systems by the spring of 2024.
The contribution to performance from these technologies in the fourth quarter was positive but lower than the third quarter, which had benefited from particularly supportive pricing for the nonferrous products we generated. The current weaker market conditions, including a significant compression of the historical price premium between the higher-grade twitch aluminum product and zorba, all the way on the contribution from these systems. Now let's move to Slide 14 to discuss our steel mill performance.
Demand for finished steel in the fourth quarter in our Western U.S. market remained steady and reflected the lift from summer seasonality on construction activity. Finished steel sales volumes reached 152,000 tons, up 7% sequentially. Our mill operations reached full utilization, significantly higher than the U.S. average of 77% for the period. Average net selling prices for finished steel decreased 7% sequentially, driven by lower raw material inputs and pressure from imports, although down slightly sequentially, metal spreads at our mill remained healthy in historical comparison. As Tamara mentioned, we believe our mills tends to benefit from the expected demand created by the U.S. infrastructure bill. Now let's move to Slide 15 and discuss cash flow, capital structure and our outlook for the first quarter.
Operating cash flow in the fourth quarter was strongly positive at $135 million, driven by EBITDA profitability and benefits to working capital, including from the lower commodity price environment and collections from several ferrous bulk shipments that have been delayed at the end of the prior quarter. Benefiting from the strong cash flow generation, our net debt ended the quarter at $243 million, a reduction of more than $100 million sequentially. Availability under our credit facility remains sizable with a borrowing capacity of $800 million and a maturity of August 2027. Net leverage was 21% at quarter end and the ratio of net debt to adjusted EBITDA was 1.7x. We also returned capital to shareholders through our quarterly dividend.
During the quarter, we entered into interest rate swaps to fix the rate on a portion of our floating rate credit facility. The swaps have a 3-year duration and a notional amount of $150 million. Execution of these contracts provide us with more interest rate certainty while also benefiting from the inverted yield curve. CapEx spend in the fourth quarter was $28 million. For full fiscal '23, CapEx was $118 million. Net of insurance reimbursements primarily associated with the repair of the shredder enclosure building at our Everett facility.
Looking ahead, we currently project our fiscal '24 CapEx investments to be lower compared to the past year at approximately $100 million. Approximately 25% of the anticipated spend will be for growth projects including the completion of our nonferrous technology initiatives and investments to support recycling services expansion. The remaining CapEx will be for maintaining the business and environmental-related capital projects. Our effective tax rate on fourth quarter adjusted results was 32% and 31% for full fiscal '23. For fiscal '24, we expect the tax rate to be in the range of 25%, but reflects some quarter-to-quarter variability, including in our first quarter of fiscal '24, when the rate is projected to be lower at around 15%, subject to company performance.
While we are just over halfway through the quarter, I'll now turn to our outlook for the first quarter of fiscal '24, which is based on information and market conditions we have today that may be subject to significant volatility due to geopolitical uncertainties. We expect our consolidated adjusted EBITDA per ferrous ton to remain approximately flat compared to the fourth quarter when excluding the insurance recoveries. In the lower price environment, we project a modest detriment from average inventory accounting in the quarter. We expect our federal sales volumes to be approximately flat sequentially. Our nonferrous volumes are projected to be up 10% year-over-year, reflecting benefits of our strategic nonferrous recovery investments and expansion of our platform. We expect the contribution from our steel mill to remain healthy but declined sequentially, reflecting a 10% to 15% decrease in sales volumes due to normal seasonality, along with the impact of lower average finished steel prices. We expect the initial benefits from the implementation of our new fiscal '24 productivity initiative program to more than offset the impact of inflation and loss of operating leverage due to lower volumes in the quarter. Finally, we expect our operating cash flow in the first quarter to reflect a seasonal detriment from working capital. For full fiscal year '24, we aim to continue our trend of generating positive operating cash flow through the cycle.
And with that, I'll turn the call back over to Tamara.
Tamara L. Lundgren
Thank you, Stefano. As we conclude our remarks today, I'd like to thank our employees once again for their resilience and dedication to working safely while continuously serving our customers and communities, supporting our suppliers and demonstrating the critical and essential role of our business and industry and the economy. You have demonstrated once again why we have continued to be a leader in the recycling industry for over a century. And I look forward to the next steps in our company's history as Radius Recycling. And now Olivia, let's open the call for questions.
Question and Answer Session
Operator
(Operator Instructions) And we have a question coming from the line of Samuel McKinney from KeyBanc.
Samuel J. McKinney
As you mentioned, scrap supply flows were tight in the summer quarter, now that we are headed into the winter, is it safe to say that there's some more availability for both scrap flows and spreads to fall? And what are you seeing just in general from your peddlers.
Tamara L. Lundgren
Well, what is really driving the continued tight supply of scrap are a couple of things: lower manufacturing activity, lower construction and demolition activity and just the slowing economy generally. Combined are just higher collection cost for scrap as inflation pressures have hit suppliers and interest rates are obviously higher than they've been in the past. So we are projecting a continuation of these tighter supply conditions until we start to see some changes in the economy and the things that we're looking for is increased PMI, i.e., increased manufacturing activity, resolution of the UAW strike, which will -- should resolve both ferrous and -- or should help to improve both ferrous and non-ferrous supply flows. Clearly, stabilization in ferrous prices and nonferrous prices for that matter, I think, will help supply flows as well and obviously help margin compression. And then lastly, in '24, we are expecting to see a higher flow, a higher pace of funds coming through from the U.S. infrastructure bills.
Samuel J. McKinney
And then moving to ferrous, domestic and export volumes sequentially decreased by a pretty similar percentage in the fourth quarter. Given the guidance that Stefano gave for the first quarter of '24, any sort of divergence expected between domestic and export volumes in the first quarter?
Stefano R. Gaggini
This is Stefano. Yes, just from an outlook perspective, at this point, we don't expect that divergence to be a factor as we look at our Q1 outlook. Obviously, Tamara mentioned the UAW strike, that could be a factor that could be helpful on the domestic side. But at this point, there is still uncertainty regarding that.
Samuel J. McKinney
Understood. And then lastly for me, on the nonferrous side, Tamara touched on it during the call that you all did a solid job during this quarter on the nonferrous volume side. Moving into next year, can you talk through some of the various pricing headwinds that you might face in that space? I know there's a lot of moving parts there. And what can be done to perhaps mitigate some of those impacts, including the cost reduction initiative you announced today?
Tamara L. Lundgren
Sure. Let me start at a high level. And then Stefano, why don't you add some specifics. At a high level, it's the same dynamics that we're speaking about before, which is manufacturing activity, as well as the UAW strike has really impacted nonferrous production as well. So we see some -- we expect that, that will resolve over time. And so both flows and prices should stabilize and get back on that positive trend of meeting this higher demand due to the transition to low-carbon technologies whether it's electric vehicles or solar or wind, for example, all of these low carbon technologies require more metals and particularly more nonferrous metals than the technologies that they're replacing. So we're really looking for those economic trends to come through and those funds from the U.S. infrastructure bills to start to flow in '24. Stefano?
Stefano R. Gaggini
Yes. And then, Sam, from what we can control, obviously, we have talked about being excited about having made progress on our deployment of the advanced nonferrous recovery technologies. That's how we want to gain benefit from nonferrous side recovery from trading operations until we provided that and we should see the run rate of those increases as we go into FY '24 as per our comments. And then with respect to your questions on productivity initiatives, so today, we announced in this incremental initiative program targeting benefits of $30 million on an annual basis. We have a process to track these initiative based on KPIs and other data points to support the achievement and so we are confident we will be able to gain benefit from that. We have already started implementing these measures in our first quarter and we expect to realize an initial benefit from them in the quarter in the range of probably half of the quarterly run rate implied in the $30 million annual number.
Operator
Thank you. And I see no further questions in the queue at this time. I'll turn the call back over to Tamara Lundgren for any closing remarks.
Tamara L. 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
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
