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Metalico, Inc. (NYSEMKT:MEA)

Q3 2013 Earnings Conference Call

November 12, 2013 10:00 AM ET

Executives

Carlos Agüero - President and CEO

Michael Drury - EVP and COO

Kevin Whalen - SVP and CFO

Analysts

Brent Thielman - D.A. Davidson

Robert Manning - Private Investor

Operator

Good morning, my name is Cliff and I'll be your conference facilitator. At this time I would like to welcome everyone to the Metalico 2013 Third Quarter Results Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be question and answer period, today's call is being recorded for transcription purposes. The purpose of today’s call is to discuss the results of the Company’s operations for the quarter ending September 30, 2013.

Earlier today Metalico issued a Press Release announcing their third quarter results and filed a report on Form 8-K in connection with the release. The company is scheduled to file its quarterly report on Form 10-Q for the period ending September 30, 2013 shortly. You can access copies of Metalico’s filings through the SEC’s Edgar online files or directly through 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 the SEC filings in the left column. Then click to download the report. Metalico’s filings are also available at the SEC’s 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 this call’s conclusion. To access the recording callers will be required to enter the conference identification number of 36004816.

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 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 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 a more detailed discussion on 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 from the 10-K for 2012 which is also available online.

In addition, during the course of today’s 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 reconciliations of these non-GAAP measures to what 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

Welcome, and thank you for joining us today. With me here today is Michael Drury, our Executive 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 the call.

As many of you’ve read in our earnings release this morning, the company improved its performance in the third quarter with adjusted operating income of $1.8 million and adjusted net income of $938,000 or $0.02 per share. Unfortunately, the effects of non-cash charges for goodwill and acquisition write offs gave us a negative earnings for the period. Our scrap selling prices have been in a prolonged slump dropping $77 per gross ton since the start of 2012.

The effects of price drops, a weak economic recovery and excess recycling industry capacity have collaborated to impair the valuation of our intangible assets. I know without saying it was a difficult quarter for our peers in the scrap metal recycling industry, as well does not provide much comfort. Nevertheless, we are encouraged by our improving results to continue general economic recovery and long-term prospect for the metals recycling industry. Moreover, the goodwill charge does not affect the company’s liquidity or compliance with its covenants.

The company has previously commented on commodity prices and competitive pressures for sourcing scrap. We have experienced better flows into our scrap yards and the price of materials is not being bid up as aggressively by competitors. Our results for the quarter are evidence for this. The fourth quarter has started out with rising prices but tighter scrap supplies. We remain confident in our ability to continue navigating through very compatible environment and believe strongly in the long term viability of Metalico.

Now let’s go over some particulars of the quarter or as compared to last year’s third quarter. In this quarter the metal recycling segment saw adjusted operating income improve by $3.2 million from $2.9 million adjusted loss. As anticipated scrap selling prices softened during the period, especially ferrous scrap which we sold at an average price of $4 per gross ton less than what we did in last year’s third quarter. Sequentially, ferrous selling prices also dropped slightly during the quarter despite rising somewhat in July.

We shipped a 152,000 gross tons in the quarter, a 13% increase from last year. And so far this year we have shipped in excess of 431,000 gross tons of ferrous products translating to 41% of our consolidated quarterly sales.

Our average selling price for traditional non-ferrous base metals was down $0.03 to $0.95 per pound as a result of softer prices for aluminum and stainless steel. Non-ferrous unit volumes for the quarter increased 4% to just over 45 million pounds. Year-to-date we have shipped a 135 million pounds, amounting to 45% of quarterly sales. At the current pace both ferrous and non-ferrous, annual volumes should surpass 2012.

The lead fabricating segment completed another good quarter with operating income of $1 million compared to $1.4 million in the same period last year. Continued change in product mix towards higher value products led to improved average selling price.

Year-to-date quarterly volumes fell 8% to 10.4 million pounds, which was impacted by moderation in ammunition related sales and reductions in sales tied to severe weather roofing repairs. We anticipate the lead fabricating segment will continue to perform well into 2014. Companywide, we remain focused on maintaining disciplined metal buying practices, controlling costs, and driving volume to increase utilization of plant capacity. We have reduced operating expenses and SG&A expenses, largely due to further automation and consolidation of administrative functions.

In our release issued earlier this morning, we detailed the year-over-year third quarter financial statements and volume comparisons reflecting improved operating results for the reasons discussed. I won’t repeat those details but instead provide some highlights and refer you both to the release and our Form 10-Q for the quarter which we expect to file later today.

Let’s go over some comparisons of the third quarter compared to second quarter of this year; sales rose 5% to 136 million from 130 million; adjusted operating income recovered to 1.8 million compared to a loss of 2 million; adjusted net income was 938,000 compared to $2.7 million loss; adjusted income per share was $0.02 compared to a loss of $0.06; EBITDA more than doubled to $6.6 million from $2.7 million; unit volumes rose by 12% for ferrous scrap and 3% rise for non-ferrous; lead product shipments fell by 11% to 10.4 million pounds compared to 11.7 million pounds.

Let’s go with some balance sheet highlights; in the period we had cash on hand of 4.6 million and availability under our revolving credit facility of 36 million for combined liquidity of $40.7 million sufficient to operate our business. Nine months ended September 30th, Metalico generated $18 million of cash from operating activities compared to $15 million through nine months of last year. During the two previous years, Metalico made significant capital investments for growth and replacement of material handling equipment. As a result of these investments, we have reduced capital expenditures during 2013, limiting expenditures to normal replacement of existing equipment and making opportunistic new business investments and acquisitions to strengthen our platforms.

Year-to-date in 2013 Metalico’s investor a total of $10 million for equipment, capital improvements and to acquire three scrap metal feeder yards. In addition, since the beginning of the year, debt balances have been reduced by over $8 million. We have repurchased or committed to repurchase 12.6 million of convertible notes so far this year. The Company acknowledges the importance of refinancing our debt and we are working diligently to resolve

This issue before the effective maturity dates. After the latest repurchase, the outstanding convertible note balance will be $56 million. Since 2008, the Company has retired nearly half of the $100 million notes issued to finance acquisition. We remain optimistic about resolving the maturities in a timely manner.

Before I start out on our outlook, I want to once again remind listeners of our policy on guidance and forward-looking statement; Metalico’s long standing policy is not to provide guidance and earnings estimates; nothing we say today should be interpreted as earnings guidance; scrap recycling industry is highly cyclical; commodity and other prices can be volatile and can fluctuate widely; 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 purchases and shipments; our outlook for the near-term reflects expectations of continued moderate economic improvement in the manufacturing, infrastructure repair and industrial sectors.

Looking at the metals industry by product category, let’s start with ferrous. Domestic steel production has been steady around 76% of reported industry capacity. Finished steel prices have been rising of late supported by strong demand for automotive and energy related products, although some of the demand is being met by rising imports. After a series of scheduled and unscheduled outages, domestic mills are coming back on line looking to melt scrap, to build inventories and to increase production.

On the scrap front, demand and prices for export are improving. Scrap availability is tightening and expected to become more competitive with the onset of potentially disruptive winter weather. Consequently, given rising domestic and export demand, the Company expects to see higher scrap selling prices along with fierce competition for supply in the months ahead.

Moving over to non-ferrous, including aluminum DeOx pricing. Pricing for aluminum, copper and other non-ferrous metals has been flat to trending lower for most of this year. This trend is expected to stay intact for the remainder of the year. However, demand for metal units for export and domestic consumer remains firm. The Company anticipates that fourth quarter non-ferrous shipments will be slightly below the third quarter levels and that pricing will trend sideways until early next year.

In 2014, Metalico expects demand for aluminum, and hopefully it’s pricing, to increase, driven by growing demand from the automotive sector to lower vehicle weight and improve mileage. Nickel prices should remain subdued lulled by low demand, under utilization of production capacity and record high warehouse metal inventories.

The Company expects prices for PGM metals to gradually improve after very mediocre performance so far this year. Sourcing and supply is anticipated to remain quite competitive consistent with the recent past. Minor Metal prices continued to exhibit weakness after setting stable but lower floor pricing amidst sluggish demand from manufacturers.

Lead Fabricating; Metalico anticipates financial performance of this reporting segment to remain consistent with recent past quarters. Volume shipments should also be consistent with third quarter, aided by favorable product mix and stable raw material costs.

Thanks to recent acquisitions our work force has increased to a headcount of 763 people. We believe our per employee productivity is comparable to any of our peers and we encouraged by enthusiasm and commitment of our people in the field.

Lastly, I would I like to thank our suppliers and consumers for their business. And of course, I thank all of our shareholders who are continuing commitment and support to Metalico.

This concludes our prepared remarks. Operator lets open up the call for any question if we have any.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Brent Thielman from Davidson and Company. You may go ahead.

Brent Thielman - D.A. Davidson

Carlos, you mentioned you seeing some buying pressures relating somewhat, are you seeing a competitive landscape change or is it more due an improving in reservoir?

Carlos Agüero

There has been a little bit scrap out there. There have been some closures of yards announced and some consolidation in general. So, I think not one single factor but combination of factors which have created a somewhat an improving supply situation.

Brent Thielman - D.A. Davidson

And then you touched sort of broader steel market activity in utilization rates. Can you talk a little bit more about what you’re seeing from your steel customers, within your own territories and you think their utilization rates are comparable higher or lower versus kind of an national operating rates you’re seeing?

Carlos Agüero

I don’t know whether I can tell you about comparisons between our region and other regions but I can tell you that in our region some areas have good strong demand, other mills are slow and their order books are weak. But I think the biggest factor is the, there is two factors, one is mills coming back online after outages which I mentioned earlier and the second is recent expansions and high value that will create more need for scrape at certain mills. When you put those two together what we feel is the demand for scrap and particularly for short scrap growing over the next few months.

Brent Thielman - D.A. Davidson

The volume decline and where it is accelerated here in the last few quarters. Can you just talk little bit more about what’s driving that?

Mike Drury

We’ve seen a moderation in ammunition demand, products that are related to ammunition, and for the last few years we’ve been writing the tailwind of extraordinary demand for ammunition related to more people owning guns or whatever is driving it.

We also had significant demand for last year from storm related products, principally roofing and that was in the Saint Louis, Chicago, Ohio area from hell damage actually. So, not, fortunately for those votes didn’t try this year maybe unfortunately for us it didn’t occur but overall very pleased with the demand and specifically with our continued drive to volume to value added product mix.

Brent Thielman - D.A. Davidson

Just lastly, I’m sorry if I miss this in the beginning but did you provide your available borrowing capacity and the revolver as of the end of the quarter.

Carlos Agüero

Yes. I think that it is right around $36 million under the line.

Operator

Our next question comes from Robert Manning a Private Investor. You may go ahead.

Robert Manning - Private Investor

Is there anything new on capacity rationalization in the industry?

Carlos Agüero

Other than what we reported in our prior call out to second quarter, we have not learned of any new closures anywhere. So the answer would be no, it’s kind of where it was. Earlier in the year, we did see several facilities close, several share has been mothballed and so forth. But in this last 90 day period, we haven’t seen any additional that I can recall.

Robert Manning - Private Investor

There is a bullish (Ph) article on the Wall Street journal last Friday about lead pricing implications of that for us if any?

Carlos Agüero

Series of our battery.

Robert Manning - Private Investor

Primarily about batteries, I don’t know that affects us at all or not?

Carlos Agüero

Well, it does in that some of our supply is tied to scrap battery pricing in the United States, so the implications are that we could see modest increases in raw material cost but I think we’ve demonstrated pretty successfully that we have the ability to pass those increases along to our consumers.

Robert Manning - Private Investor

Right, thank you.

Operator

(Operator Instructions) I’m currently sure we have no question at this time

Carlos Agüero

Well, Clef what we normally do as we wait about minute and if folks don’t come up with questions conclude the call so we will give it 60 seconds.

Operator

We have a question from Steven [indiscernible] Private Investor. You may go ahead.

Unidentified Analyst

I just have a question. I know that your short term liabilities, I was looking at the statement that you guys released and it says that pending maturity is January 23. I just want to know, are you guys any closer to being able to refinance it or having more complete options that you know of?

Carlos Agüero

Well, obviously, we’re keenly aware of the situation and we’re working on it and as we stated in our release and in our prepared remarks that we’re optimistic that we’ll be able to resolve it before [indiscernible].

Unidentified Analyst

I actually asked this question last call and you’ve listed I guess many options and I just want to know, if you’re any closer, what are the options taking the sale off some of your businesses or do you think you would be able to refinance or what kind of instructions there’re going to be if you’re able to refinance?

Carlos Agüero

We don’t want to do speculate what we’re going to do and our policy is to report on things once they are competed not to try to anticipate our so certainly as I said earlier, we’re working on different options we’ve available and we will get it done in a timely fashion and really that’s all we are able to say at this time.

Unidentified Analyst

All right, I will be just patient for now. Thank you.

Operator

And I am sure we have no further questions at this time. I am sorry we have a question from Dan Snyder (Ph), Private Investor. You may go ahead.

Unidentified Analyst

Carlos, in the last couple of months at the end of August, Metalico’s named from a number of your locations, has been on a bankruptcy filing from one of your consumers? How is that number being recorded or where is that number showing as a loss or are you showing as a loss or you’re waiting to see what happens through bankruptcy court, how are you accounting for that?

Carlos Agüero

Typically when a major customer like that goes bankrupt you reserve for the new take the adjustment, you take the charge at the time of the bankruptcy, you make an adjustment in your books, and so we have already reflected that in our reports.

Unidentified Analyst

And what was the number, can you say that?

Carlos Agüero

I don’t have the exact number, but it was well over million dollars and it was the steel mills, you know, RG Steel.

Unidentified Analyst

I am talking more about the key well situation?

Carlos Agüero

The key well situation is still developing, it’s a lot smaller and circumstances for us little bit different on that and we have reserves in our books to cover a substantial portion of that.

Operator

And I’m sure we have no further questions at this time.

Carlos Agüero

Alright we will do what we did, we’ll wait a few seconds if not, we will forward to conclude our call. Okay Clef, we will conclude our call so I want to say thank you for everyone that joined our call today and for your interest in Metalico’s results and development and certainly look forward to speaking with you once again in March of next year when we present the annual results. Until then hope everybody continues to be well and 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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