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Metalico, Inc. (NYSEMKT:MEA)

Q1 2013 Earnings Call

May 9, 2013 10:00 AM ET

Executives

Carlos Agüero – Chairman, President and CEO

Michael Drury – EVP

Analysts

Brent Thielman – D.A. Davidson & Co.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

Operator

Good morning. My name is John and I will be your conference facilitator. At this time I would like to welcome everyone to the Metalico 2013 first quarter results call.

All lines in place on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. I would like to remind you that today’s call has been recorded for transcription purposes. The purpose of today’s call is to discuss the results of the company’s operations for the quarter ended March 31, 2013.

Earlier today Metalico released 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 a file its quarterly report on Form 10-K for the period ending March 31, 2013 shortly. You can access copies of Metalico’s filings through the SEC’s Edgar online files or directly to the company’s website at www.metalico.com. Just log on to the website click on Investors at the top of the home page and then click on SEC filings in the left column, and then click to download the report. Metalico’s filings are also available at the SEC website at www.sec.gov.

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 the call’s conclusion. To access the recording callers will be required to enter the conference identification number of 34725855.

As is 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 subject to risks and uncertainties including those risks set forth in Metalico’s filing with the SEC. These risks could cause actual results for the current period and beyond to differ materially from those expressed in any 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 more detailed discussion of forward-looking statement and a 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 2012 which is also 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 provided reconciliation to these non-GAAP measures to it believes are most directly comparable GAAP measures in the earnings release.

Thank you, ladies and gentlemen. I would not like to turn the call over to Mr. Carlos Agüero, President and Chief Executive Officer of Metalico.

Carlos Agüero

Good morning, welcome and thank you for joining us today. With me here are Michael Drury, our Vice President and Chief Operating Officer and Kevin Whalen, our Senior Vice President and Chief Financial Officer. Following my remarks we will be available for questions. We will also post a transcript of our remarks along with the question-and-answer session on our website when the transcript becomes available after this call.

As reported earlier this morning our first quarter resulted in a net loss but saw a solid improvement from the fourth quarter. On a consolidated basis Metalico generated $611,000 in operating income before deducting interests and taxes which (inaudible) were non-functional in our loss in Q1. In the last few years we have reported three operating segments, Scrap Metal, Fabricating and PGM and Minor Metals. But our PGM and Minor Metals volumes are not as meaningful compared to relative size of the other two segments.

So starting with this quarter PGM & Minor Metals Recycling has been absorbed into Scrap Metal Recycling segment. Any previously reported numbers discussed today in the press release have been adjusted to reflect this change. The first quarter was characterized by softening prices across the commodity metals sector that Metalico trades in particularly for ferrous scrap which we sold at an average price of 66$ per gross tons last when we did in last year’s Q1. We shipped a 143,000 gross tons this quarter, an increase of 13% over last year mostly related to the additional of our new Buffalo Shredder.

Non-ferrous metal prices during the quarter were generally in a downward trend, yet due to the mix the average selling price of a pound of metal sold was virtually unchanged. Overall, units sold trended approximately 9%. In the quarter Scrap Metal Recycling contributed $1.3 million in operating income before corporate overhead sequentially better despite difficult market conditions that had persisted into 2013.

Metal margins although at lower levels than we like were stable compared to Q4 of 2012 and volumes were up resulting in sequential operating income improvement. Lead Fabricating segment business was the bright spot in Q1 contributing operating income of $1.5 million before corporate overhead compared to $685,000 in the same period last year. Price increases in higher volume product mix helped to increase average lead selling prices.

Year-to-year volume sold for the first quarter was virtually flat at about 10.6 million pounds but our average selling price per pound rose by 9% to $1.64 from $1.50 per pound. We anticipate continued strong performance trends from fabricating while we address the struggles on the cost side of Scrap Metal Recycling. At Metalico, we’ve not wavered from our goal of improving scrap margins and controlling operating cost and overhead. Year-over-year operating cost have fallen on a per unit basis, and SG&A expenses are down 10% mostly due to reduction in payroll and related fringe benefits.

While a strong economy will surely help generate more scrap supply and better pricing, our discipline buying and cost containment efforts are directed at operating profitability in this sluggish economy.

Now let’s go over some sequential quarter comparison here. Although we are disappointed with the loss this quarter’s performance improved considerably over the fourth quarter of 2012. Sequential sales grew by 7% to $138 million from $129 million. Operating income as I mentioned earlier recovered to $611,000 from an adjusted loss of $1.7 million. The net loss of $1.2 million was an improvement from an adjusted for impairment net loss of 2.8. The loss per share was $0.02 compared to an adjusted loss of $0.06 per share. EBITDA rebounded to $5.5 million from $3.5 million.

Unit volume shipped increased by 13% for ferrous and 9% for non-ferrous scrap. Lead shipments increased by 26% to 10.6 million pounds from 8.4 million pounds last year in the same quarter. In our release distributed earlier this morning the detailed the year-to-year first quarter comparison reflects lower financial performance for the reasons discussed here today. I won’t repeat these details now but instead I will refer you to the release and to our Form 10-Q which we expect to file Friday afternoon after the market close.

Let’s go over a few balance sheet highlights. The company continued to strengthen liquidity with outstanding debt falling to $125.5 million as of March 31, 2013, that was from $130.4 million at the end of 2012. The decrease is principally due to capital expenditures totaling $ 2 million, to changes in working capital and the application of cash generated from operations to our revolving credit facility. The decrease in working capital reported to $79 million from $111 million stems primarily from the reclassification of the company’s senior credit facility to short term due to its 2014 potential maturity. However, we are very optimistic about our refinancing of the convertible notes this year and extending our credit facility to 2016 as is provided for in credit agreement.

Shareholders’ equity changed very little at $180 million as of March 31, 2013, from the same $180 million as the start of the year. Shares outstanding remained virtually unchanged and availability from the company’s revolving credit facility stood at $42.4 million.

Before I start on our metals outlook I want to remind listeners of our policy and guidance and forward-looking statements. Our best practice as is common in the 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 metal price regularly fluctuate in value. We’ve consistently stated that earnings estimates could prove to be unreliable because of the unpredictability and magnitude of the price swings and the related effect that it would have on volume shipments and margins.

Now few words on our metals outlook; starting first with ferrous metals. After starting strong early in 2013 ferrous pricing has drifted sideways-to-down in what is a weakening finished steel demand environment. Industry capacity utilization remains stuck around 75% and is plagued by excess capacity, by competition from imported steel and sluggish finished steel product demand. The only area really experiencing strong demand at this point is steel for automobile production.

Weak demand in both domestic and export markets is keeping ferrous scrap prices subdued. Availability of scrap supply is experiencing a normal seasonal upswing, but remains tight relative to prior years. Ferrous scrap pricing is currently at year’s low, but we expect it to be at, or near the bottom of the cycle.

Moving to nonferrous, the base metal prices of aluminum, copper, nickel and lead have generally been softening since early 2013, and continue to be soft today. We do not anticipate that non-ferrous metal prices will recover significantly in the near term. However demand from consumers is steady while scrap supply remains tight. De-ox aluminum product volume and pricing should continue to fluctuate along with steel industry demand, which as we said earlier is expected to remain soft.

On our lead fabricating, despite recent disruptions in U.S. lead smelting capacity, the markets for scrap and refined lead continue to be adequately supplied and we expect continued strength in many of the markets served and products sold.

Moving on, I would like to move on to comment a little bit on industry conditions and trends. Analyst reports indicate that competitive pressure in our industry are driving companies to report under performance relative to past years. On previous calls we have commented that in our thinking the industry is faced with over capacity, especially in shredding and a scarcity or tightness of scrap supply. These factors have resulted in pressured metal margins and consequently the reported under performance that I just referred to.

Availability of scrap and over capacity were common topics of discussion at the Annual National Scrap Recycling Convention held in Orlando, Florida, last month. Recently we have observed anecdotal evidence that the industry has begun to take notice and is starting to address the issues of overcapacity in margins, initially by shutting down less productive shredders. Metalico management is aware of the status quo and likewise we are regularly evaluating alternative options for streamlining operations for reducing cost and securing reliable sources of scrap supply at prices that would generate acceptable margins. These options may include consolidating operations, divesting of non-core assets or possibly swapping assets in select territories with others. We are keeping all of our options open and under review with a goal of delivering results and value to our shareholders despite the challenging industry circumstances.

Finally, in closing I would like to once again thank our suppliers and consumers for their business and thank all of our employees and managers for their steadfast support, their attention to safety and commitment to improvement. Also I thank all our shareholders for their continued support to Metalico during this challenging time.

This concludes our prepared remarks, operator. I would like to open the call for any questions we might have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Brent Thielman from D.A. Davidson. Please go ahead.

Brent Thielman – D.A. Davidson & Co.

Hi. Good morning.

Carlos Agüero

Good morning.

Brent Thielman – D.A. Davidson & Co.

Carlos you mentioned the seasonal upswing in scrap supply but based on levels of demand do you anticipate seeing sequential improvement in ferrous volumes.

Carlos Agüero

Sequential improvement, I’m not sure and I don’t think we’ll see a decline. I don’t know the significance of the improvement, more alike flat to a small upswing would be the anticipation, just given the time of the year, Brent.

Brent Thielman – D.A. Davidson & Co.

Sure. And then also on the Scrap Metal Recycling segment would be interested in hearing some of the progress, I guess in terms of the initiatives you’re taking to improve the supply chain and combat obviously to the extend you can in this challenging margin environment?

Carlos Agüero

First and foremost the key is to evaluate every source of scrap that you’re getting and looking at the margin that it generates and where you can best sell in to consumers and that’s really the area where one can have the most impact. And we do that at each one of operation on a regular basis. Building on that off course we have transportation is significant element to this business and we look wherever possible for a transportation efficiency primarily moving into the bulk categories where there would be by rail or by water that trends to bring lower frame cost so we look to do that wherever possible.

And then lastly from an operational standpoint both the operating level produced in the product and from a back office administrative level we look to see where, where opportunities to combine and reduce cost wherever possible. So these are the things that we we’re focused on.

Brent Thielman – D.A. Davidson & Co.

Okay and then the progress on SG&A do you have a target for fixed SG&A for this year as you’re looking at expenses across the company?

Carlos Agüero

The target is to continue to improve on the cost and particularly on the per unit cost and an overall, not specific to our target but more since we’re viewing all the operations we’re looking at the combinations and consolidations. We don’t have a specific dollar level we’re trying to hit but just the effort of continually bringing those numbers down. And not just from the SG&A level but certainly on the operating costs level too.

Brent Thielman – D.A. Davidson & Co.

Okay. Just and lastly on the lead business volumes were – looked essentially flat year-by-year but your commentary suggests there were more optimistic outlook. What do you see in that we don’t necessarily see in the volumes comparisons this quarter?

Carlos Agüero

I think that we comments about it, it’s a different mix of products higher value added product that we’ve been shifting to, our ability to pass on higher prices to some of the consumer of the products which is widening the spread if you will. And that’s the effort, the supply – the volume is somewhat flat just related to the lack of let’s say strong economic activity, but it’s certainly it’s our focus on selling what we can make a good margin on and continuing to again there control costs. So that has resulted in higher margin and better EBITDA in that segment.

Michael Drury

Brent its Mike Drury. I would just add that last year we had a much milder winter so there was lot more construction activity in the first quarter than this year. So while those volumes are flat there is certainly from our perspective an improvement in 2013 over 2012 and now we have a much more harsh weather this year and outdoor activity was greatly curtailed so you don’t have the benefit of looking at the mix but we’re pretty pleased with the volume given that we had such a harsh winter.

Brent Thielman – D.A. Davidson & Co.

That’s helpful. I will pass the bucket.

Carlos Agüero

All right, thanks.

Operator

(Operator Instructions). Our next question comes from Scott Huntington from Bodell Overcash. Please go ahead.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

Good morning folks. How are you doing this morning?

Carlos Agüero

Good morning. Good and you?

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

I’m fine, thank you. I have a couple of kind of (Inaudible) here. One is more of a housekeeping issue. We understand that the macro scene here is kind of difficult in your industry but as you are going through this rapid growth via acquisition or just extension of the footprint. In that it’s not surprisingly that you experienced some (inaudible) but also people and inventories and safety and the management of financial controls. But when you look at this hard work you have done over the last year overcoming these many obstacles how strong do you feel that you have the people necessary to move forward if market (conditions improve)?

Carlos Agüero

I think we have a very good team of people very qualified and dedicated with a lot of experience and everyone is focused on the task at hand of dealing with the difficult macro business environment. And so I think that we’re comfortable with where we are in terms of our management team, our personnel and can certainly we’re continuing to make inroads in improving the business as much as we can under these circumstances.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

Very good. On the last conference call Michael he handled the call and maybe I should have asked at that time whether it’s going to be released or not but success or failure that you, around attempting to procure additional sources of metal is there any – anything you can expand on your absence last meeting?

Carlos Agüero

It happened just sort briefly it happened to coincide with a previously scheduled meeting for a large job that is coming up which we feel confident that we are in line to secure. We’ve been given indications that we will in fact get it and we are now just waiting for confirmation and permits. But that’s really, because of competitive reasons I really don’t want to go in to it any further. But I will say that it was a successful visit and we expect to get results from it.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

That is outstanding to hear. And lastly I made one other mistake on the last conference call. I had asked Michael about the lead division and I think his comment was that he had to receive what folks would consider a bona fide offer. What I did not follow up on is the investor bank still engaged in soliciting offers for the lead division and just could you expand on that little bit?

Michael Drury

Hey Scott Mike Drury again. No, we’ve largely put that effort to the side as you are aware these sort of efforts are disruptive to management specifically the guys running the lead segment. So we went through the process and as we said stated earlier we were not satisfied with the levels, the valuation that we received. So as we speak today we will continue to run the lead segment and look for very good things to come from it.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

Very good. So the answer is the banker has been disengaged.

Michael Drury

I guess that’s a fair way to look at it. Yeah.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

That a yes or no, Michael?

Michael Drury

I’m not sure I misunderstand the question I think I answered that for the time as we speak today we’re not actively marketing the company.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

And therefore is the banker engaged or has been disengaged? Because if you did hire someone to pursue that if I am not mistaken.

Michael Drury

We didn’t have a formal disengagement. I can tell you that we paid them all the fees they incurred in the effort.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

So if you are pursuing it means they are not engaged.

Carlos Agüero

If you like to interpret that way that’s fine. Look we maintain relationships with bankers in all different areas in connections in the matter. And the fact that they are not working on this particular matter today does not mean that in the future they may not have some call to deal with us on something us.

Scott Huntington – Bodell Overcash Anderson & Co., Inc.

Very good. That does answer my question. Thank you.

Carlos Agüero

Sure.

Operator

(Operator Instructions) Our next question comes from Thomas Johnson from TBJ Enterprise. Please go ahead.

Unidentified Analyst

Good morning.

Carlos Agüero

Good Morning.

Unidentified Analyst

Good operation this quarter, congratulations. You are on positive cash flow. I would like to get your thoughts on the further consolidation in the industry as far as opportunities you guys to build your (spokes and wheel) operations and also what about the barriers to entry. It seems like there are still companies opening up smaller operations, opening up scrap yards, I am just curious how they can operate or try to operate in the bottom of the where the margins…

Carlos Agüero

Well the outlook for consolidation I don’t know about, I can’t predict whether it’s going to get lot more active but we commented earlier in the prepared remarks that we expect that there will be actions taken by the industry to reduce over capacity. So you can interpret that to be a number of things. It could be consolidation, it could be closures of less productive plants, it could be reducing size of our certain footprint there is a lot of different ways about that.

But as far as the other question that you asked barrier to entry with more buying centers, the barriers to entry are much less because you can open up a location with a permit of small footprint, a warehouse and a few pieces of equipment and you will be buying scrap and the small guys can do it because they often times will have very little overhead and don’t always follows to the letter of law, all the rules and regulations until they are brought to task by regulatory agencies. And so you do get some sense where folks will get in there and open what we call small nuisance buying centers which can affect the pricing in the local market but generally it contained to a small geographic area.

As far as the barriers to entry for bigger operations of course that’s a whole different matter and the barriers are much larger, you need a lot more capital, you need a lot more equipment, you need a lot more know-how and experience in order to be able to be successful. So it’s a totally different setup between opening up a small neighborhood buying center and opening up a large – competitive footprint somewhere.

So you do see the smaller ones, I don’t see as many of the larger ones. I have not seen too many of those opening up and hopefully the folks in the industry are getting smarter and not pursuing the idea of adding more of shredders to the already existing significant capacity of shredders that exist in the country of which you may or may not know, many of those shredders are not operating at optimum capacity or many are operating at 50% or 60% or somewhere in the neighborhood. So it doesn’t bode well for someone to come in and want to spend the significant amount of dollars it requires to open up a new large facility when the existing ones are not operating anyone near capacity for the most part.

Unidentified Analyst

Thank you. I was wondering as far as the strategy and like do you see industry in a shake up now? You have been operating very effectively for 13, 14, 15 years and over that period of time are you seeing actually more operations changing and consolidating, or how do you feel about overall industry over that period of time. As I know in 2008 you went through a situation where there were overcapacity that (hurt) you guys and you had to make some adjustments. Are you pretty much in that area right now and how do you feel about the shake out that I see coming in, in the industry?

Carlos Agüero

I think I have already covered it but we are competitively speaking relative newcomers to the industry. There a lot of companies out there that have been around 50 to 80 to 100 years. So we are still a relative newcomer to the business. Well we are seeing is that with scarcity of supply, tight margins, high cost to get into the business and sluggish demand from the U.S. steel industry that it may force people to look at further consolidation and what timeframe I couldn’t begin to tell you but I think that that is a natural thing in any industry that suffers from capacity that people will eventually start to look at ways to correct that and we’ve talked about both in the prepared remarks and I think I was addressing it a little bit earlier too.

But as far as the shake-out your guess is as good as mine, if it comes and when a lot depends whether the economy strengthens further or weakens that will be a factor whether the cost of capital, availability of capital to stay in the business while it gets more expensive or less expensive. The availability of scrap whether it increases or decreases so there are many factors and you are asking me to predict something that I don’t have the ability to predict. But I think the general answer is any industry that has too much capacity will eventually rationalize and make adjustments to try to reduce our capacity. So that’s how we look at it.

Unidentified Analyst

In relation to your other competitors last year just to make sure (inaudible) strong and international trade areas had less more domestic in their operations. I know that affects some of the margin. How do you feel about the international trade right now and how your company and in that area?

s

Carlos Agüero

Our company deals primarily in the domestic trade. We do export I will tell you. The bulk of our business is domestic. We serve to domestic consumers, we do have certain grades of products, that are better suited for export but that is a very small part of our business so it doesn’t really affect. We do occasionally sell to some of the large exporters when the markets are right for that, we do ship to them and they will put it on board and send it overseas but that’s not the really core part of our business.

The core part of our business is to remain domestic so we are not affected by whatever maybe happening as much on international level although it does affect the pricing internationally does ripple through the domestic market so to that extent we will be impacted.

Unidentified Analyst

Okay, thank you sir.

Carlos Agüero

You are welcome.

Operator

We have no further questions at this time.

Carlos Agüero

Okay we’ll give 60 seconds as we normally do on these calls and if no other questions surfaces we can move to conclude it.

Operator

(Operator Instructions)

Carlos Agüero

Okay John well then I don’t know if 60 seconds has gone by but it certainly feel like it so why don’t we move to conclude the call unless somebody wants to jump in and ask something else. We are not hearing that. Then let’s just thank everyone for participating and joining us today and for your interest in Metalico’s results and developments and we certainly look forward to speaking to everyone once again this summer when we present the second quarter results sometime in early August.

In the meantime everybody have a safe day and we’ll talk to you very soon. Thank you very much for your participation. Good bye.

Operator

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

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