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Metalico (NYSEMKT:MEA)

Q4 2012 Earnings Conference Call

March 8, 2013 10:00 AM ET

Executives

Michael Drury – EVP and COO

Kevin Whalen - SVP & CFO

Analysts

Frank Gillman – DA Davidson

Scott Huntington – Bodell Overcash Anderson

John Johnson - Private Investor

Howard Landis - Private Investor

Bruce Robinson - Private Investor

Operator

Good morning my name is Larisa and I’ll be your conference facilitator. At this time I would like to welcome everyone to the Metalico Fiscal Year 2012 Results Call. (Operator Instructions). The purpose of today’s call is to discuss the results of the company’s operations for the year and quarter end of December 31st, 2012.

Earlier today, Metalico issued a press release announcing fourth quarter and annual results and filed a report on form 8-K in connection with the release. The company is scheduled to file annual report and form 10K for 2012 shortly. You can access copies of Metalico’s filings through the SEC’s sector online files or directly through the company’s website at www.metalico.com. Just log on the website, click on, ‘Investors’ at the top of the homepage and then click on, ‘SEC filings’ in the left column, then click ‘download the report.’ Metalico’s filings are also available at the SEC’s website at www.sec.com.

In addition, an audio replay of the call will also be available at 888-843-7419 or at 630-652-3042, for the first week after this call’s conclusion. To access the recording callers will be required to enter the conference identification number of 34324614.

As it's customary, let me reiterate the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The following discussion contains forward looking statements that are subject to risks and uncertainties including those risks set forth in Metalico’s filings with the SEC. These risks could cause actual results for the current period and beyond to differ materially for those expressed in forward looking statements made by or on behalf of the company.

We refer you to Metalico’s periodic reports that are filed from time to time with the SEC. For a more detailed discussion, or forward looking statement, any discussion of the factors that could cause results to differ materially from the discussion today, please refer to the Risk Factor Discussion in Metalico’s Annual Report on form 10-K for 2011, which will also be available online. In addition, during the course of the conference call, certain non-GAAP financial measures may be described which should be considered in addition to and not in lieu of comparable GAAP financial measures. The company has then provided reconciliations of these non-GAAP measures to what it believes are the most directly comparable GAAP measures in the earnings release.

Thank you ladies and gentlemen. I would now like to turn the call over to Mr. Michael Drury – Executive Vice President and Chief Operating Officer of Metalico. Please go ahead.

Michael Drury

Welcome and thank you for joining us today. I’m Michael Drury, Metalico’s Executive Vice President and Chief Operating Officer. Our President and CEO Carlos Aguero is unavailable today because he is visiting and working on potential source of new scrap materials. That’s all I will say about him today but a lots will be discussing and fruits of his efforts on a future call.

I’m joined today by Kevin Whalen, our Senior Vice President and Chief Financial Officer. Following my remarks Kevin and I’ll be available for questions. We will also post a transcript for our remarks along with the question and answer session on our website when the transcript becomes available after the call. As you’re all aware 2012 was a challenging year, difficult market conditions throughout our industry meant that steady gains made through the first half of the year were offset in the second half of the year by weakening prices, constrained supply, the effect of a large consumer’s bankruptcy and inventory theft and shrinkage at one of our major facilities.

Let’s now briefly recap the 2012 results all compared to 2011. More detailed results are available on today’s press release. We recorded revenues of 574 million down 15% from 661 million. Metalico generated operating income of $4.4 million as compared to 32.6 million and EBITDA of 27 million a decrease of 49 from 2011.

2012 yielded adjusted net income of $202,000 compared to net income of 17.4 million. We shipped 538,000 gross tons of ferrous up slightly from 535,000 and we shipped a 175 million pounds of non-ferrous up 24% from a 141 million tons last year.

The scrap metal recycling segment produced breakeven operating income excluding non-cash goodwill impairment charges of 7.5 million in the year as compared to operating income of 23.7 million in 2011. Operating income suffered from intense competition for ferrous scrap which obviously is effective margins. Scrap metal revenues accounted for 69% of total revenues in 2012 compared to 59% in 2011. PGM recycling continued to be impacted by competition, restricted supply and volatile metal pricing. The result was fewer units purchased in 2012 and lower margins.

Excluding the non-cash impairment charges of $12.1 million, the PGM and minor metal segment reported an operating loss of $1.8 million compared to operating income of $7.4 million last year. The lead segment showed a strong performance in 2012, operating income increased by a 178% to 6.2 million from $2.2 million. We saw a recovery in several markets served, sales from newly developed products, improved margins for more efficient production and increased reliance on scrap, alloy and refining. We have previously announced that we’re considering strategic alternatives for our lead fabricating division including a possible sales.

The indication of interest we have received to-date have not met our expectations and no transaction is pending at this time. Now let’s take a look at the balance sheet. The company had year-end cash on hand of 5.4 million, working capital finished the year at a $111 million to maintain our current ratio of nearly 4:1 (ph) compared to a $150 million of working capital last year.

Today we have $44 million of availability on our credit facility providing ample liquidity for running our business. Shareholders equity fell to a $181 million from a $192 million at the prior year end. During 2012 we invested 23 million in capital expenditures principally from internally generated cash flow while our net debt after payments increased by less than $2 million. In addition to upgrading our sites in Elizabeth, New Jersey and Buda, Texas, we made significant improvements to our shredders, we placed cranes, we built balers and stationary shears and made truck container and other equipment purchases.

We have nearly completed our two year program of facility in shredder upgrades and expect that in 2013 we will see CapEx at greatly reduced levels. In 2012 we acquired two New York State Auto Salvage Yards. In February we bought a facility and located in Buffalo only a few miles away from our shredder.

Late in the year we purchased another lot of salvage yard in the Rochester area. Both facilities continue their traditional business of dismantling cars and selling used parts and both have been consistent providers of scrap holds (ph) to our shredder while regularly recovering converters, batteries and aluminum rims. In December, we also began operation of a ferrous scrap yard in Cleveland, Ohio through a joint venture. During its first 10 months of operation our Buffalo Shredder shipped 84,000 gross tons of total products. Pittsburg shredding operations maintained normal production levels while undergoing productivity improvements. The Youngstown shredder was offline for several months for a major upgrade but it's expected to increase throughput in 2013.

As we have said before our strategy is still to focus on building our scrap yard now through acquisition or expansion into areas that we think will enhance our presence in our current markets. The company always had a number of additional locations under review or in discussions to become part of our growing network. Metalico’s goal is to maintain strategic discipline on acquisitions and to keep all options open for opportunities as they arise.

As that inspire our results and those of our public peers, the industry continued to be hampered by overcapacity of shredders and constrained supply of obsolete scrap which creates upward pressure on buying prices thus impact margins. In our opinion the reservoir of available scrap that was built over a decade or more prior to the financial crisis has been largely consumed and near sufficient time has passed and strong enough economy activity has provided the environment to replenish scraps and stock piles. This condition is likely to be with us effecting markets for some time to come.

The company is focused on addressing the scarcity of scrap supplied by employing strategies designed to broaden and diversify secure services of ferrous and non-ferrous scrap supply. Among several options our two approach which could help improve our scrap flows. First we will corporate with an integrate further into the order of salvage industries to help secure a reliable source of junk parts for our shredders and other recyclable metals. The (inaudible) and support demolition contracts to secure scrap at the source. Metalico believes these two areas are logical expansions of our existing business that should be pursued in instances where our expanded presence will not threaten or drive away important existing suppliers.

Before I start on our market outlook I want to remind our listeners our policy on guidance and forward-looking statements. Metalico’s practice as is common in our industry is not to provide guidance and earnings estimates. Nothing we say today should be interpreted as earnings guidance. The scrap recycling industry is highly cyclical and commodity metals prices regularly flush away widely.

We have consistently stated that earnings estimates could prove to be unreliable because of the unpredictability and potential magnitude of commodity price swings and the related effect on scrap volume shipments. Now for a few words on market outlooks. Starting with ferrous we expect ferrous pricing scrap pricing will be volatile as we have seen thus far in the first quarter of 2013.

Pricing should be supported by scarce supply and possibly at strengthening export market. Despite the continued and gradual recovery of the economy the U.S. steel industry is impacted by excess capacity and high cost. These factors invite competition from imported steel which may impact scrap demand.

We expect to increase ferrous scrap shipment volume above 2012 levels as production of shredded product continues to grow. Demand for non-ferrous based metals particularly aluminum from the automotive industry should remain very solid as the economy recovers and many foreign markets continue their growth.

Having said that however the aluminum deox market remains quite competitive and steel industry demand is captured at best. Base metal pricing should be soft as long as the U.S. dollar remains strong, Europe remains in recession, warehouse metal inventories remain high and inflation is in check.

On the PGM side changes in investor sentiment appears to be impacting platinum and palladium pricing. As funds flow out of precious metals and into other investment opportunities. Strong automotive demand coupled with declining mine production might help support PGM prices. Continued substitution of higher priced platinum with lower priced palladium should tamper any overall cost increases.

Addressing lead fabricating we anticipate continuous strength in any of the market served by our lead fabricating unit. The shortage of junk batteries may also support higher product selling prices and new product development will probably have a positive impact on product shipped. Finally I would like to again thank our suppliers and consumers for their continuing business.

We also greatly the loyalty and hard work of our co-workers. Last week we here at Metalico acknowledge our investors and shareholders for their continued support. This concludes our prepared remarks, Larisa I would like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Frank Gillman from DA Davidson is online with the question.

Frank Gillman - DA Davidson

Mike I guess in the scrap metal recycling segment, beyond sort of challenging market conditions were there any unusual cost for some of the expansion initiatives that would have diluted your margin in Q4?

Michael Drury

Well Frank typically with any startup there our cost but they wanted materially in nature in Q4, unfortunately the quarter was impacted by a lot of the issues we discussed which was the overheated competition for by time somewhat scarce scrap supply. So even in markets have strengthen pricing, margins continued to be pressured.

Frank Gillman - DA Davidson

Okay and then with at least a relatively more favorable environment here versus what you experienced in Q4, can you confirm whether the scrap business is profitably in the first couple months of this year?

Michael Drury

Well Frank as you know we don’t disclose results prior to releases, so I will confirm that we’re aggressively sourcing scrap, our productivity levels are favorable and markets while volatile in January and February certainly strengthen in March.

Frank Gillman - DA Davidson

Okay and then on the PGM and minor metal segment I guess assuming no meaningful changes in the operating environment or pricing, when can we potentially see that business reach breakeven or some level of profitability given some of the things you’re doing internally there.

Michael Drury

Well our expectations for the PGM business is to have a profitable 2013 although on reduced volumes, as we have discussed in the past we have really taken a big step back in the Texas market from pursuing much of the material that’s offered down there. It's lower yield material and the competition for it is extremely intense, basically you’re operating on favors for margin. So we have made a position to step away from those sort of products.

Again though having said that we expect to be profitable in 2013 on PGM side.

Frank Gillman - DA Davidson

Okay and then on the lead business I mean a real nice increase here on profit margins, Q4 specifically have been more difficult quarter historically if I recall. Can you discuss a little bit more of the factors that contributed the margins, because your volumes were still down year-over-year and kind of how long these levels profitability can sustain going forward because I guess I’m assuming there has been something out of the ordinary here?

Michael Drury

Well I don’t believe there was anything out of the ordinary really in the fourth quarter, we just had a very strong fourth quarter, radiation protection was particularly strong, we had a great quarter from many of the roofing products we shipped it was a mile quarter in reality so a lot of that act to our activity continued through the fourth quarter and our expectation is that 2013 we will probably surpass 2012 level, so we’re very bullish on the lead segment going forward and of course the trends on the ammunition side, will certainly help.

Frank Gillman - DA Davidson

Just a couple of quick ones like I guess with respect to some of the new product the developments, what are some of the initiatives there specifically and how quick we begin to roll out and to what extent are they large enough to kind of benefit volumes in 2013 and then also with these products have a positive impact on margins going forward?

Michael Drury

I will start as the last part of that question first, yes they will have a positive impact going forward, roll-out is a little more difficult to put our finger. As you’re aware when you enter a market with a new product you’re typically not entering a market without competition so there is investment necessary of time and effort to get consumers comfortable with what you’re offering and get them to the table to buy the product. But we expect by second half of the year we will see some improvement in product shipments over the last year assuming everything else remains equal from new product specifically what they are I would rather not get into that, I don’t want to tip our hands to our competitors right now that were coming but we’re coming.

Frank Gillman - DA Davidson

Last one if I could just the increase in SG&A with sales down year-over-year, anything within that to be aware as we’re thinking about modeling going forward.

Michael Drury

Well we had some cost impacts in the SG&A and specifically in the second half of the year related to preference claim charges from RG Steel’s bankruptcy and of course we don’t expect they will be recurring, so I think we had an increase that again won't be recurring and so we should be back to more traditional levels of SG&A.

Operator

Scott Huntington with Bodell Overcash Anderson online with question.

Scott Huntington – Bodell Overcash Anderson

Just I have a three easy ones or well two easy ones I believe, first of all lead for sales side it's still on the lead division?

Michael Drury

I think I mentioned in prepared script that we went through the process and evaluating strategic options, we received indications to value and they weren’t what we would consider anywhere close there for the business especially in my opinion but we’re all hoping to further discussions but again right now we don’t have anything that in front of us that would excite us and given the performance of the lead division last year and what we see is real strong 2013 we’re certainly not unhappy with the results of the process. It's very strong performer, great management team, and we expect all those issues to benefit us in Metalico going forward.

Scott Huntington – Bodell Overcash Anderson

Yes but what you’re saying is the right number came on it's still marketable in your eyes.

Michael Drury

Yes I would agree with that Scott.

Scott Huntington – Bodell Overcash Anderson

And this past inventory problem with the walking off the site, any update on potential recovery of those assets or what portion of those assets disappeared?

Michael Drury

Well unfortunately the folks that we have identified that were involved don’t have the (inaudible) to really participate in any sort of recovery and so again I don’t expect to see any benefit from the prosecution. So I guess the answer is no there aren’t but hopefully that problem is well behind us and we want to deal with it again.

Scott Huntington – Bodell Overcash Anderson

And when I first got in involved with you folks, it's a consolidation theme in the industry, and it seems like your too has become like a cottage industry where the point now so these new yards are generally t-shirts and glasses and jackets, much like the gasoline business in the 70s.

You think we’re getting a point where just have two months somebody going they are going to step back on this similarly rapid pace of growth.

Michael Drury

Well the rapid pace of growth is really just I think a direct reflection of the tough economic times where more and more people are turning to scrap as a way it can make a few bucks and the giveaways you’re talking about, we’ve been participating in those for year and much rather have a supplier where in my t-shirt than a competitors, but we have seen some indications in the last few months that some white flags are going up. I think it's been well documented that metal management has closed several other facilities, some in the markets we participate in which is the (inaudible). The way for it for this industry is through consolidation; take some of the capacity out of the system and to reduce the competition for the scrap that is available and I would expect you will continue to see that.

Operator

(Inaudible) is online with a question.

Unidentified Analyst

I had a question if you could give few comments about your shredder residue business in terms of the outlook perhaps a peek at profitability, what’s happening in the area of technology and competition and in particular what are the strengths of the foreign markets that you sell into.

Michael Drury

Well the residue from shredders the ASR and the (inaudible) for the most part end up in landfills. All of our shredders employee state of the art downstream recovery systems and we believe we are as competitive with anyone and you know pulling the metal out of the residue. There is all, all is new technology coming to market. We typically take a latency approach before making significant investments in that technology. We’re quoted on an ongoing basis by some of the mafnacturers of that technology and again we evaluated and when we feel its appropriate time for making investment because the technology has been proven we will make the investment. On the foreign side again I don’t believe anyone is exporting their ASR there is virtually no value in it that would support export.

So, does that answer your question Tom?

Unidentified Analyst

Well I guess I was specifically not referring to the call for action but referring to the aluminum fraction that comes out of your shredder residue and the copper fractions, those that really generate significant cash and potential profitability and for the technology and is employed to further separate and sell into domestic and foreign markets.

Michael Drury

Well a large part of your profitably stream for any shredder has to come from the recovery of the non-ferrous metals and streams if you’re not recovering that material you’re not in business. Again we believe we’re running state of the art technology and we’ve very favorable relationships with all our consumers on the Zorba, Zurich (ph) and the copper bearing scrap steels (ph) that comes out of the shredding process and we’re selling into those markets on an ongoing basis.

Operator

John Johnson, Private Investor is online with a question.

John Johnson - Private Investor

Two questions, what’s that your company taken to ensure that a debt will happen in the future, have you secured insurance to these type of events?

Michael Drury

Well we have insurance but as you can imagine the deductible is quite high, and then as to what steps we’ve taken, we’ve I think taken the appropriate steps with security cameras and alike at all of our facilities. We have also undertaken new management techniques of inventory from the moment it hits our yard to the moment that leaves the finished product. So hopefully we’ve taken the appropriate steps, this is not an issue that is unique to Metalico unfortunately it's in fact an industry wide issue and again we have learned from our mistakes and from the short comings of our systems and I believe for the most part we will not be subject to this sort of large loss in the future.

John Johnson - Private Investor

And what will be the cost of the upgrades that you made to ensure, to minimize that this will happen again.

Michael Drury

They are not material, it's basically camera systems and alike but it's not material cost.

John Johnson - Private Investor

Okay another question, given that the market is at all-time highs and Metalico is been hovering around at all-time lows, how does management justify their relatively high salaries at this particular point in time.

Michael Drury

Well I’m not sure that this is the appropriate venue for discussion of management’s compensation you know our stock price is something we’re certainly not satisfied with and at the end of the day their performance will result in a better stock price.

Operator

(Operator Instructions). Howard Landis, Private Investor is online with the question.

Howard Landis - Private Investor

One question Michael, can you comment on how you see yourself with bank covenants through 2013?

Michael Drury

Howard we have a I guess an ongoing policy of in key areas like we’re operating in a container; we’re constantly in communications with our banking growth. We had some covenant issues at the end of 2012 which because of our communications we address quite easily. I would say given our covenant levels today we should be in a good shape for 2013 and again we have excellent communication with our banks the three banks that are in the group and again expect no more major issues going forward.

Operator

(Inaudible) is online with question.

Unidentified Analyst

I got just a follow to that last covenant question, can you provide any kind of color with the waiver received, did you guys receive your covenants or what was there unfolded from that?

Kevin Whalen

We did have an EBITDA covenant issue for the fourth quarter, we got an amendment from the bank to retroactively reduce the covenants like we managed in the fourth quarter and we reset covenants going forward for the current year based upon our projects for what we expect to operate so like I said we’re constant communication with our banks and we have a good relationship with them an discussion about the covenant issues will be disclosed in the 10K which we expect to file within the next week.

Michael Drury

I would like just add that the changes to our covenants is no way impacted our availability or liquidity.

Operator

Bruce Robinson, Private Investor is online with a question.

Bruce Robinson, Private Investor

My question Mr. Drury you said the way forward in this industry through consolidation and I’m wondering does Metalico see itself as a consolidator or a consolidatee and if the latter is true excuse me if the former is true you’re balance sheet will be in turmoil if you were on an acquisition to a serious level and if the latter is true if you look at – have you considered yourself as an acquiree?

Michael Drury

The best way to answer that is management would have a fiduciary obligation to take to the Board of Directors any serious offer to acquire Metalico and then if that kind of board decision based upon what’s in the best interest of the shareholders. On the acquirer side as we stated in the past our focus is on the markets that we operate in to further identify and consolidate in those marketplaces and I think we have proven for the last two years that we can be effective at that by acquiring smaller operations, bringing them into the Metalico fold with little impact to our balance sheet. As we mentioned earlier our current ratio is very strong, our working capital is very strong, our debts very manageable and our availability is in fine shape even after having made those acquisitions.

Bruce Robinson, Private Investor

So you’re not considering being acquired at this point given the stock price?

Michael Drury

Well typically you consider being acquired by putting yourself up for sale and as far as I know we have not done that.

Operator

We have no further questions.

Michael Drury

Well why don’t we folks a minute or two the rest of two to come up with question if they might and if not we will end the call.

Operator

(Operator Instructions).

Michael Drury

I guess Larisa that’s it on the question. So just like to close by saying thank all of you for joining us today and for your interest in Metalico’s results and developments. We look forward to speaking with you again in May when we present our 2013 first quarter results.

Operator

Thank you ladies and gentlemen this concludes today’s conference. Thank you for participating. You may now disconnect.

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