Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Metalico, Inc. (NYSEMKT:MEA)

Q1 2010 Earnings Call Transcript

May 6, 2010 10:00 am ET

Executives

Carlos Aguero – Chairman, President and CEO

Michael Drury – EVP

Analysts

Richard Paget – Morgan Joseph

Brett Levy – Jefferies and Company

Eric Prouty – Canaccord

Brent Thielman – D.A. Davidson

Nat Kellogg – Hudson Securities

Scott Blumenthal – Emerald Advisers

Shaun Nicholson – Kennedy Capital

Operator

Good morning. My name is Jessica and I will be your conference facilitator. At this time, I would like to welcome everyone to the Metalico 2010 first quarter results. (Operator Instructions) The purpose of today's call is to discuss the results of the company's operations for the quarter ended March 31, 2010.

Earlier today, Metalico issued a press release announcing first quarter results and filed a report on Form 8-K in connection with the release. You can access copies of Metalico's filings in 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 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 800-642-1687 or 706-645-9291 for the first week after the call's conclusion. To access the recording, callers will be required to enter the conference identification number of 70262512.

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 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 of forward-looking statements and a discussion of the factors that could cause results to differ materially from the discussion today, please refer to Metalico's Form 10-K for 2009, 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 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. Carlos Aguero, President and Chief Executive Officer of Metalico.

Carlos Aguero

Good morning and thank you for joining today's conference call. With me here today are Michael Drury, our Executive Vice President and Eric Finlayson, our Senior Vice President and Chief Financial Officer. Following my presentation, we'll be available to answer any questions you might have. We will also post a transcript of our remarks in the question-and-answer session on the Metalico website when the transcript becomes available after the call.

Earlier today, Metalico released financial results for the third quarter of 2010 showing substantial improvements in virtually all of the operating metrics tracked by the company. These include but are not limited to revenue, unit shipment, operating income and EBITDA.

Those results are attributed to all around hard work and solid execution, combined with the positive effect of increased shipment and commodity metal price tailwinds during the period. They also reflect an economy that is showing tons of recovery and industrial production and consumer spending and a company that is positioned to participate in the recovery. Momentarily, I'll review our results in detail but first, I'd like to share with you our general observations on conditions affecting our performance.

During the first quarter, capacity utilization in the steel industry rose steadily, thus having a positive impact on ferrous scrap pricing. We also experienced rising demand from consumers of non-ferrous commodity metals and rising selling prices during the period.

Many areas of the economy and related employment have not yet recovered. Manufacturing activity and consumer spending trends are still well behind where they were a few years ago. Since these are primary drivers of the generation of scrap metal in all commodity types, scrap supplies continue to be below historic norms. However, with the end of the winter weather, we have seen a healthy uptick in volumes at all of our locations.

During the quarter, both demand from scrap – for scrap from consumers and commodity metal prices experienced considerable positive momentum. As we have discussed in previous calls, we had made debt and operating cost reduction our highest priority last year and we believe that today we've seen positive results from those efforts that position us well for the future.

Let's go over some of the highlights. First quarter financial highlights include the following, all as compared to the first quarter of 2009. Sales jumped by 152% to $134 million. Operating income of $13.6 million recovered substantially from nearly breakeven last year.

Net income on a non-GAAP adjusted basis was $6.4 million and adjusted earnings per share were $0.15. We'll explain these adjustments in just a few minutes. Under GAAP, reported net income was $3.5 million or $.08 per share, compared to a loss of $3.6 million or $0.10 per share a year ago.

EBITDA increased 363% to $17.6 million as compared to $3.8 million. EBITDA as a percentage of sales for the quarter was 13.1%, which exceeds our internal target of 10% for consolidated operations after corporate expenses. We also believe that our EBITDA margin is at the higher end of the range when compared to our industry peer group.

Adjusted net income of $6.4 million and adjusted earnings per share of $0.15 reflects first quarter performance without non-recurring and fair value charges that are required under GAAP. These include non-cash charges of 2.7 million for a pre-tax write-off of unamortized debt issuance cost and a $341,000 pre-tax charge to close out an interest rate swap when we terminated our former credit facility.

Those charges impacted earnings per share by $0.05. Metalico also recorded a non-cash, $948,000 fair value adjustment for its outstanding warrants, which impacted earnings per share by $0.02. Excluding corporate overhead charges, the company's scrap segment for operating income increased more than ten-fold to $15.4 million from $1.3 million while the lead fabricating segment showed small but positive results with $124,000 in income compared to $600,000 in the first quarter of 2009.

Comparing sequentially with the fourth quarter just passed of 2009, operating pro forma improved substantially as well. Sales jumped by $59 million driven mostly by volume. I'm sorry – sales jumped 59% driven mostly by volume. Operating income of $13.6 million was a jump of more than 350% over the $3 million of last quarter.

Reported net income of $3.5 million, was swing to a profit from a net loss last year of $6 million. EBITDA nearly tripled to $17.6 million from $6.3 million, all again, as compared to the fourth quarter of 2009.

First quarter operating income improved substantially, primarily as a result of a jump in ferrous and non-ferrous unit shipments as compared to the fourth quarter of 2009 and also by modestly rising prices. Our balance sheet also continues to improve.

During the quarter we closed out – we closed on our new secured credit facility led by J.P. Morgan Chase Bank. We immediately benefited from the significant reduction and interest expense and as our working capital needs expanded with the upswing in business activity.

Capital expenditures for the first quarter totaled $1.1 million, an increase of $633,000 from the first quarter of 2009. We expended $818,000 on scrap metal recycling and $234,000 for the lead fabricating segment, primarily for equipment purchases in both segments.

As of March 31, Metalico had approximately 46.4 million common shares issued and outstanding and we had no outstanding preferred stock. Breaking down the quarter, the results of scrap metal first. The scrap segment generated $120 million of revenue, more than triple the $38.6 million posted in the first quarter of 2009.

Our figures for this year's first quarter include the operating results of our Youngstown operations, which were acquired in mid-December of '09. We derived 38% of our scrap revenue in the quarter from ferrous sales and 62 from all our non-ferrous metals. Operating profit for the scrap segment before corporate overhead rose to $15.4 million, compared to $1.3 million in the same quarter last year.

We realized a 42% increase in our ferrous average sales price to $357 per gross ton this quarter, which was up by $105 a gross ton compared to the average of $252 in last year's first quarter and a $65 per gross ton sequential increase from $292 a gross ton in the December quarter. The average selling price for non-ferrous scrap in the quarter was $1.05 per pound compared to $0.68 per pound in the prior year quarter and $0.92 per pound in the fourth quarter of '09.

We have changed how we report PGM units, converting all reported volumes to troy ounces versus pounds of substrate, which is consistent with industry standards. PGM prices in the quarter were higher than those in the previous year quarter, reflecting increased precious metal investment demands and automobile production and its impact on PGM prices.

We realized an average PGM selling price of $966 per troy ounce compared to last year's $571 per troy ounce, which is an increase of 69%. Metalico's volume of metal sold for the first quarter included 127,100 gross tons of ferrous, which is a 90% increase over the 67,000 gross tons we sold in Q1 of 2009 and it's 110% increase over the sequential quarter sales.

We sold 36 million pounds of non-ferrous metal in the quarter, another significant increase, 74%, from the 20.6 million pounds of a year ago and a 37% increase over the sequential quarter. Aluminum, stainless steel, nickel based allows, copper, brass and molybdenum were the primary contributors to our non-PGM volumes sold.

Back on PGMs, the 35,700 troy ounces of PGMs sold in the quarter was three times higher than last year's 11,800 troy ounces. Sequential troy ounces sold dropped by only 1% from the strong fourth quarter 2009 shipments. Shifting over to the lead fabricating segment, in this year's first quarter we generated sales of $14.2 million compared to same period sales of $14.7 million in 2009. We generated operating income before corporate overhead of $124,000 compared to operating income of $600,000 for the first quarter of last year.

The lead segment realized an average selling price of $1.46 per pound in the quarter compared to $0.95 per pound in the first quarter 2009 and $1.39 in the fourth quarter just passed of '09. Volumes rose 2% sequentially to 9.8 million pounds, but were lower year over year due to last year's strong market for ammunition-related products.

In the first quarter of–in the 2009 first quarter, we sold 15.5 million pounds. All in all, the first quarter was an excellent period for our business and we're encouraged by the trends that we're seeing. We have to be extremely cautious however before we make any assumptions about where the economy goes from here.

Meanwhile, we are optimistic about our prospects. As always, our employees at all levels deserve credit for their attention to safety and all the effort they put in every day to make us successful and we sincerely thank them all for their contributions. Now, a word on guidance and forward-looking statements.

Metalico's current practice like many others in our industry is not to provide guidance for earnings estimates. The scrap recycling industry is highly cyclical and commodity metal markets are often very volatile. We believe earnings estimates would be unreliable because of the unpredictability, duration and magnitude of commodity pricing. One has to look no further than this week to see that that's true looking at how metal prices have fluctuated widely during the entire week.

Now, I'd like to present our current outlook and update on what we believe are the industry trends that we are seeing. During the first quarter of 2010, all grades of ferrous scrap experienced steady price increases. Demand from domestic steel mills and scrap metal consumers expanded and is anticipated to remain firm.

Going into the second quarter, domestic ferrous scrap prices have retreated modestly and demand is somewhat sluggish, but we expect those factors to strengthen going into the middle of the year. Intake of ferrous scrap has experienced considerable seasonable improvement. And Metalico anticipates that the dip in ferrous selling prices provides a good buying opportunity, but if sustained may impact flow into the yards.

Demand for non-ferrous scrap continues to be strong and pricing for most grades has remained steady despite high levels of inventory at public warehouses. The flow of non-ferrous scrap into yards is brisk and is expected to remain so as long as commodity metal prices remain around current levels.

Demand for aluminum de-ox product remains very strong. Pricing has shown improvement due to rising steel industry capacity utilization and tightness of supply in some aluminum scrap grades used to make that product.

Average prices for PGMs have continued to increase in the second quarter, but can fluctuate widely from day to day. The supply of catalyst has been supported by good pricing and flows have maintained a steady pace.

We believe that PGM prices will continue to be supported for the remainder of the year by rising automobile production, both domestically and in China through investment demand created by PGM exchange traded funds that were launched in the first quarter of this year and by sluggish production from primary PGM mines which may cause supply to tighten. We continue to expect improvement in PGM troy ounces recycled driven by a stronger economy, rising commodity prices and in part by increasing our share of the converter recycling market.

Fabricated lead product sales should benefit during the second and third quarter from customary seasonal construction activity and from improvement in the healthcare and commercial construction markets. As we have stated before, our goal is to continue to be a leading participant in the secondary commodity metals businesses and the complementary niche businesses in which we operate.

We will focus on improving operating density within our existing geographic markets and we'll further leverage our existing platform by proactive sourcing and internalizing scrap flows. We plan to invest in complementary scrap processing capacity addition as well as expansion and tuck in acquisition where and when they become available to us. And with this, that concludes our prepared remarks. So Operator, I would like to turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions.) Your first question comes from Richard Paget from Morgan Joseph. Your line is now open.

Richard Paget – Morgan Joseph

Good morning, guys.

Carlos Aguero

Good morning, Rich.

Richard Paget – Morgan Joseph

Wondered if there was any weather impact in the quarter, given where your assets are?

Carlos Aguero

Well, earlier in the first quarter there's certainly sluggishness in the receipt of material but we were well positioned with plenty of inventory. So it didn't really have much of an effect on us.

Richard Paget – Morgan Joseph

Okay. And then, moving on to the lead, profitability was a little bit lower than I was expecting given where the volumes ended up as well as the pricing, anything unusual going on there?

Michael Drury

Rick, this is Mike Drury. That was one segment that did have some impact from weather. It was a harsh winter so there wasn't much in the way of repair work or construction going on. The first quarter of last year was benefited from the significant ammunition related sales that we experienced and this year that has paled off as I think everyone expected. As Carlos mentioned in his comments on looking forward, we expect that – one thing the harsh winter will do is impact the number of roofs that need repair, commercial roofs primarily. So we expect that you'll see an uptick in volume from that.

Richard Paget – Morgan Joseph

Okay. But even sequentially, I mean, it seems like profitability in the fourth quarter was a little bit better on lower pricing and volumes.

Michael Drury

Well, a lot of it has to do with product mix.

Richard Paget – Morgan Joseph

Okay.

Michael Drury

And markets that you ship in to impact the product mix and some of our higher products are outdoor related.

Richard Paget – Morgan Joseph

Okay. And then, I wonder if you could give a little bit more detail on your capital expansion plans? Any kind of CapEx guidance or what we should be looking at and then, on the tuck in acquisition side, just given that pricing and volumes have been up, has kind of the window of opportunity to get some cheap assets for acquisitions, is that kind of – are we past that now and have sellers prices expectations gone up?

Carlos Aguero

Well, seller's prices expectations seem to be the slowest to go down and so, I would say that often times there's still say ahead of reality, so we still see some of that. But as far as there being opportunistic situations, there will always be some of those, certainly in bad markets, but on occasions you might even them in good markets. And we're always keeping our eyes open for anything that might fit into our network of operations. As far as the capital expansion program that we talk about, that we talked about, what we see is first of all that we have a large group of platform companies where we already have either the number one or number two market share, but where we see opportunity to increase their market share and fill in gaps and voids in those areas, in either existing markets or geographically continuous markets to it.

So that's going to be one of the points of emphasis in the expansion program, either to build out new facilities or to acquire smaller ones and improve them. In addition to that, we'll continue to look at new market opportunities for platform businesses where we can go in and acquire someone that has a critical mass and good operations, good management, et cetera and that – more importantly that fits well within our geographic area. We're not particularly interested in going out to Arizona or Arkansas or somewhere that's so far away where we don't have any synergy, but we'll be able to expand further on this capital expansion over the next few months.

Richard Paget – Morgan Joseph

Okay. If – for us just to kind of ballpark think about it, I mean, historically anywhere – let's call it around $10 million in spend and then last year, it was down considerably just given what the market – I mean, is there going to be some catch up or will you guys be going back to historical levels?

Michael Drury

Rich, Mike Drury again. We're working to keep capital expenditures on the lower end of the spectrum. We had invested quite heavily in the business '07, '08 and so we're still benefiting from that. The expansion opportunities that Carlos mentioned as they present themselves would obviously impact the capital expenditures. But on an ongoing basis, I think we've done a pretty good job with positioning ourselves to avoid significant expenditures.

Richard Paget – Morgan Joseph

All right. Thanks. I'll get back in queue.

Operator

Your next question comes from the line of Brett Levy from Jefferies and Company. Your line is now open.

Brett Levy – Jefferies and Company

Hey, guys. You said you got a new lower cost bank line. What's the availability on that line and what's the total amount of the line?

Michael Drury

The facility in total is $65 million of which 58 – $57 million is the revolving credit facility.

Brett Levy – Jefferies and Company

And all of that is available based on the borrowing base?

Michael Drury

No, no. We've obviously drawn on it. We used some of the availability to retire the debt that was in place. At March 31, I believe there was $20, $21 million of availability and we're probably tracking not far from that currently.

Carlos Aguero

A good portion of that line was used to pay off debt that was carrying a 14% rate, so that brought down our availability. But as the year goes on, we expect that that will improve.

Brett Levy – Jefferies and Company

And what's the rate on the new line, L plus what?

Carlos Aguero

It's currently about 4% when you’re all in.

Brett Levy – Jefferies and Company

Okay.

Carlos Aguero

That interest rate.

Brett Levy – Jefferies and Company

About 4%. All right and then, you were saying that there's been a little bit of a dip I'm assuming in May in ferrous scrap prices. If you look at realizations, I mean, is it fair to say that prices continued to go up through April, then started to dip in May? All things equal, would you expect your ferrous scrap realizations per gross ton to be higher in the second quarter than in the first quarter?

Carlos Aguero

I would expect them to be higher and it's too early to know if they'll be lower. It's – we just finished the first month. We haven't been able to determine our profitability for the first month and second quarter, so it's really – first of all, we normally don't provide that kind of information but secondly, it's quite early in the quarter to determine the impact from the modest price decreases on ferrous that we've seen early on.

Michael Drury

And Brett, the pricing environment is very fluid for both ferrous and non-ferrous and that's an historical norm. So, it's extremely difficult, if not impossible, to predict where they're going.

Brett Levy – Jefferies and Company

Okay. I guess, I just I figure we're a little bit into May here and I'm just wondering, are you hearing down 30 bucks a ton, 50 bucks a ton? If you were to take shredded or number one heavy melt or one of the more baseline type products in a rough magnitude, what are you hearing down from (inaudible)?

Carlos Aguero

They're definitely down and it varies by region, varies by grade and some people will tell you that it's 20 or 30 or 40. And it really depends on company by company and what they are willing to do or accept. So the fact that the price may be down for someone $50 doesn't mean that it may be down for someone else the same amount because they may not be willing to sell down at that number. So it's really still developing but it definitely is lower than it was in April.

Brett Levy – Jefferies and Company

And I mean, you guys are obviously very connected in the business. What do you think is driving this? Do you think it's an Asia thing? Do you think it's just sort of more of a domestic mills have got enough scrap for the month of May or what do you think the key driver is given that we've really had about six months here of straight upward pointing arrows?

Michael Drury

Well, Brett, this is not unusual. There is a seasonality involved here where in the winter months it can be more difficult for mills to get scrap in that's not being produced at the yard level. So if you were to look back, it is not unusual to see a dip in scrap pricing once the winter breaks and you get into the spring weather.

Brett Levy – Jefferies and Company

Got it. All right. Thanks very much, guys.

Carlos Aguero

All right. Thank you.

Operator

Your next question comes from the line of Eric Prouty from Canaccord. Your line is now open.

Eric Prouty – Canaccord

Great. Thanks. Very good quarter, guys.

Carlos Aguero

Thanks, Eric.

Eric Prouty – Canaccord

Just to follow up on the previous question, pricing pulling back, maybe more importantly you guys could discuss what are you seeing with your spreads? More importantly, have you been able to lower and drop your buy price along with the lowering sale prices here?

Carlos Aguero

Well, Eric, it was no secret that May was going to be coming down. So I think our sales and most people out there started to lower pricing early in April and took significant price reductions on the buy side and what they're paying for the scrap coming in starting in April and throughout the month of April and probably into early May. So that's what you have to do to be able to keep your margins hopefully near where you want them and so, we've been doing that. That's the only thing you have control of is what you pay for scrap and you have to be – you have to anticipate where things are going to go and respond to those ahead of the trend, if you will. And we believe we've done that, so that should hopefully help to mitigate any impact from the sluggish selling prices that we're noticing now in May.

Eric Prouty – Canaccord

Great. And then, aluminum de-ox, it's good to see that starting to become a more meaningful business. Maybe without obviously getting into specific details on margins, et cetera, what kind of impact can the aluminum de-ox business have on the overall non-ferrous business line. I mean, I assume that's probably a little bit better margin than just the pure recycling part of the business?

Carlos Aguero

Well, at times it is and at times it isn't. It's really a function of what you bring in the raw material at, what price you bring that at. But I can tell you that it's been performing very well thus far in the year. We're very happy with the margins. We're seeing the volumes expand particularly as compared to last year. So we're definitely seeing a lot more volume and we're maintaining what we believe are some very, very healthy margins in that segment of the business. So everything contributes. We have a lot of diverse operations and everything contributes and De-ox is definitely doing very well pulling their weight.

Eric Prouty – Canaccord

Great. And the final question here. I guess we always look for a pickup in kind of obsolete flows as the snows melt, et cetera and those flows seem to have been pretty robust. Any signs yet coming into the yards that you see actually coming out of more your manufacturing and industrial type customer bases or is it still primarily the peddler flows that we're seeing right now?

Carlos Aguero

Well, you're seeing steady peddler flows throughout. Of course, as pricing goes down, then that does seems to have an impact on the number of customers and the amount of scrap that they bring you, so that's always a factor. On the industrial side, the areas of our business where we handle a lot of industrial accounts we have seen a pickup in the amount of volume. I wouldn't say it's a huge pickup but it is definitely improved. But the obsolete scrap obviously is a big factor, a big part of it and that – I don't know if I would say it exploded, but it really jumped a lot as soon as the weather started to break in late March and early April.

Eric Prouty – Canaccord

Great. And I guess maybe if I could just sneak in one more, you mentioned your capital expenditures. Especially, when it comes to some of the sorting equipment, et cetera, are you guys targeting an internal rate of return or a payback period specifically with those investments?

Carlos Aguero

Well, we look at an internal rate of return and we certainly look at payback. We look at margin generation and certainly if you generate the kind of margins that we're expecting, we'll definitely meet our objectives for a rate of return on capital which is – we like to look at it as 20% on invested capital and we – with the margins that we would expect to get out of some of those investments, I think it's something that is certainly achievable.

Eric Prouty – Canaccord

Great. Okay, I'll hop back in. Congratulations, again.

Carlos Aguero

Thanks a lot, Eric.

Operator

Your next question comes from the line of Brent Thielman from D.A. Davidson. Your line is now open.

Brent Thielman – D.A. Davidson

Hi. Good morning.

Carlos Aguero

Good morning.

Brent Thielman – D.A. Davidson

Yes, I guess just thinking about Q2 and appreciate your comment just on intake levels increasing. And I think if you look back over the last few years obviously you tend to see an improvement in terms of ferrous volume Q2 versus Q1. I mean, is it fair to say that you think volume levels will at least be comparable to Q1 or is there anything extraordinary in Q1 that suggests it could be?

Carlos Aguero

Again it is a little early to tell. But my guess is that it would not surpass Q1. But certainly, it would be our goal to try to get as close to Q1 volumes in the second quarter, but a lot of it has to do with what happens in the marketplace. We may feel more comfortable holding back just a little bit if we see softening in price and not give it all, not spend it all. So a lot of times it isn't a function necessarily of what you're getting in. It's a function of what you're seeing as your margin and deciding whether you want to move it in one month or one quarter versus the other. So it's part subjective, obviously, and it's part objective based on what happens in the overall marketplace.

Brent Thielman – D.A. Davidson

Okay. That's helpful. And then, I guess I didn't see an inventory number for that quarter, but is there anything mentionable there? I mean, have you built any significant inventory sort of in front of this retreat that could cause some margin pressure? Any commentary around that?

Carlos Aguero

Well, the inventory from December 31 to March 31 was virtually unchanged in dollar amount. Certainly, the mix changed. Since we sold a lot of ferrous, the ferrous did come down, but the non-ferrous areas certainly held up well but the other thing that happened is since you saw increase in pricing during the course of the quarter, the material you have on hand has a higher cost or higher value. So I would say to summarize that volume in inventory is down and pricing is up.

Brent Thielman – D.A. Davidson

Okay.

Carlos Aguero

But the overall is unchanged.

Brent Thielman – D.A. Davidson

Okay. And then, you kind of pointed to some commentary in the press release with regards to maybe a pickup later or I guess sort of towards the middle of the year. I mean, are you seeing any early indications of that in your business yet or any signs of I guess stabilization of prices?

Carlos Aguero

Don't get me wrong. They're not unstable. It's just that we're going through – I think Michael Drury mentioned normal seasonal adjustments that you would get in this time of year. And the – it's a global market, there's seasonal flows. There are flows for export that impacts pricing and there's on again and off again all the time. There is certainly the prices get too high in the U.S. The U.S. could end up importing scrap and that can kind of moderate or mitigate how much it goes up. So it's a very dynamic market which I don't think anyone could really predict exactly when changes could occur. But we're trying to more provide comments that are consistent with the norms that we've seen in prior years and also with what we are observing today. And we believe that while prices are a little bit sluggish right now, that they're probably not going to go down much further. But they'll stabilize and they'll either go sideways or they'll gradually start to trend up towards the middle of the year as we said in the comment.

But all of that being said, if there's a major change in export activity. That could throw that out the window and could be a whole different impact on pricing. So it's – no one has a crystal ball, but we do believe that it's just given the macro environment that we see, the strong improving economic activity and the strong rate of capacity utilization at the mills that it's not likely that prices will collapse.

Brent Thielman – D.A. Davidson

Sure. And I guess, I mean, there have been some reports of pickup in terms of export demand. I mean, is it purely to say that domestic mills are sort of coming back to the market?

Carlos Aguero

Well, I don't know that – they've always been in the market. It's just that they are adjusting inventory levels according to their own needs and their own order books and obviously, they have strategies to try to minimize how much they pay, so they may pull back how much they buy even though they may need to in the hope that they can affect the pricing. So again, it's a very complex market and I think it's just hard to try to predict the broad strokes.

Brent Thielman – D.A. Davidson

All right, I understand. Thank you very much for the commentary.

Carlos Aguero

All right.

Operator

Your next question comes from the line of Nat Kellogg from Hudson Securities. Your line is now open.

Nat Kellogg – Hudson Securities

Morning, guys. Thanks for taking my questions. Just a couple questions. On the PGM business, are you guys going to give us some detail sort of what the trends volume has looked like historically going backwards? Is there somewhere we can go to get that?

Carlos Aguero

I think that it was in the news release at least for the – let's see for Q1 of 2010 versus Q4 of '09 and Q1 of '09 and I believe it's going to be – there'll be information in the Q now and going forward.

Nat Kellogg – Hudson Securities

Okay.

Michael Drury

The comparative information is in the Q.

Nat Kellogg – Hudson Securities

Okay. That's great. And how much seasonality is there in that PGM business? Is there any?

Carlos Aguero

It's more a function of price and well, last year it was impacted a lot by the fact that ferrous scrap prices were very low, so people were not junking cars and when they weren't junking cars, there weren't that many converters coming off and the ones that weren't coming off the cars were being stockpiled by the auto salvage companies and not selling them, because they felt that the price was too low. So it's not so much a seasonality. It's a market factor. It's what's happening to the price and generally speaking the higher the price, the more you'll see the flow of the converters coming to market.

But the slowest season is probably December, January just because people can't get at the material in some of these outgoing yards. They just don't – they're not going to get underneath the car in two feet of snow. That would be the only seasonal factor I could think of. But the biggest impact is really price.

Nat Kellogg – Hudson Securities

Okay.

Carlos Aguero

What's the price – and that will determine flow.

Nat Kellogg – Hudson Securities

Okay. And then, on the lead product mix, I mean, obviously, this time a year ago you guys benefited from the (inaudible) demand and a lot of buying surrounding that. But my impression had been that that was all things being equal a lower value product and so, would've thought that if that business went away you'd have a positive effect on product mix. So just curious if that's correct of if that's wrong and if that is correct, just maybe what else was sort of driving that product mix? Is there anywhere else where you guys saw some unexpected leaps?

Michael Drury

Yes. Not to give away all our secrets but the shot business or the shot results were dramatically impacted by the raw materials and how much scrap was in storage to make that and we have been successful – we had been very successful last year in sourcing a lot of scrap that was easily convertible into raw materials to make the shot. So that had a real positive impact on our margins and that is the primary focus of the lead division.

Nat Kellogg – Hudson Securities

Okay. That's…

Michael Drury

We did benefit last year from it and hopefully as we come into the spring season, we will see an increase in that outdoor activity, folks out shooting skeet and trap.

Nat Kellogg – Hudson Securities

Yes. And then, just on the acquisition side versus Greenfield, I mean, I'm sure you guys when you're looking at things look at sort of the build versus buy and so just sort of curious on what you guys are seeing on relative value there whether – I mean, it sounds like talking about Greenfield opportunities that maybe there's some opportunities where it's cheaper to build it. I 'm just curious if you could maybe give a little bit more color on sort of what those spreads look like.

Carlos Aguero

The build versus buy I think more applies to two areas. One is feeder yards where you can go in the local neighborhood and buy the local recycler or you can license and build one and start operating that. And so, that's where we compare a lot. On big platform operations, it's a different story. It's very difficult to just go into a market and establish a big comprehensive full service scrap yard to compete with someone that may have been in that same town for 50 years.

So that's a whole different ballgame. Where you can–the other area where you can do kind of buy versus build is in – for example, in auto wheel shredding activity where you are not dependent necessarily on everything right there in your own market where you could go out and source from a 100-mile radius and compete with the existing incumbent, if you will, the existing company in the marketplace. So that's certainly an area where you can grow by building versus buying those two areas.

But our primary focus continues to be unit profitability and not just tonnage for the sake of tonnage. You look around the industry that seems to be the norm. People are focused on generating lots and lots of tons. But when you look at the bottom line and you look at the margins, the margins are quite squeamish. They're very on the low end. So if you compare those margins to ours, you'll see why we operate a little bit different where we're interested in unit profitability and EBITDA margin and not necessary just handling more and more tons to wear out your equipment.

Nat Kellogg – Hudson Securities

Right. And then, last question. What was the adjusted tax rate in the quarter?

Carlos Aguero

The tax rate is 46.5%, I believe, which is above what we normally have seen in the 35 to 37 range.

Michael Drury

Yes. That was impacted by a couple of permanent differences – about 1.4 million flows through the income statement. Our real tax rate for lack of a better term is about 39%.

Nat Kellogg – Hudson Securities

Okay. All right, great. All right. Thanks, guys. I'll hop back in the queue. Thanks for taking my questions.

Carlos Aguero

Thank you.

Operator

Your next question comes from the line of Scott Blumenthal from Emerald Advisers. Your line is now open.

Scott Blumenthal – Emerald Advisers

Good morning. Congratulations on the quarter.

Carlos Aguero

Thank you.

Scott Blumenthal – Emerald Advisers

Thank you for taking my questions. Mike, could you provide us with what you expect to be your debt level by the end of the year? Do you have a debt reduction target of any sort?

Michael Drury

Well, Scott, I think the primary driver of our debt throughout the year will be the level of business activity that we engage in. The large majority of our debt other than the $80 million as well as the 7% convertible note is in the revolving line and hopefully you won't see those levels change dramatically as we maintain the level of activity we experienced in the first quarter and hopefully it may actually increase if we're successful in doing some of the items – the expansion items that Carlos mentioned. So it will be strictly a function of business activity, how many – how much sales we're generating and how much material is available for purchase. So I wouldn't venture a guess at this point.

Carlos Aguero

You can just say that assuming that business stayed at the current level for the entire year, you would probably have virtually little to no change in your debt level. But if we do start buying or opening yards or if pricing goes up substantially, you have to use more working capital to finance that operation and then it would likely go up. But other than that, we don't expect to have new term debt, which I think might be what you were referring.

Michael Drury

Yes. We wanted material new term debt.

Carlos Aguero

Right.

Scott Blumenthal – Emerald Advisers

Okay. That's helpful. And can you characterize or maybe give us an idea as to what kind of contribution you've got at some of your new Youngstown operations?

Carlos Aguero

We don't break out the individual operations, but certainly they contributed. We still have a lot of work to do there in terms of upgrading the facility and improving the efficiency of the operating equipment. So we've been in there for basically a quarter and so that still hasn't kind of blown its way through. But the important thing is we're in a key new market right next to a very important consumer, trying to build and enhance on that relationship and identifying ways that we can now take that new platform and grow it and build up on its profitability like we've done in some of the others. So it's a little premature but it's operating so far as to what we expected at this early stage.

Scott Blumenthal – Emerald Advisers

Is that customer taking all of the volume from that facility?

Carlos Aguero

Not all, but takes a substantial portion of it.

Scott Blumenthal – Emerald Advisers

Okay. That's helpful. Thank you. And could you, Carlos, maybe characterize what you see as ferrous export volumes rate now? I remember – I don't remember if it was two or three quarters ago, you talked about exports being very active and would you characterize it now as being normal or …

Carlos Aguero

Well, let me first – Scott, let me first clarify and say we don't do a whole lot in the export business. We do some but it's a very small part of our business. However, we do benefit from export activity because as the pricing for export goes up, it tends to put price support in the domestic market.

Scott Blumenthal – Emerald Advisers

Correct.

Carlos Aguero

So we were always happy to see the export market pick up because we believe it will firm up or even raise pricing in the local market. But I don't think that we're anywhere near I wouldn't even say 10% of our volume goes export, if that. It's probably even a smaller amount. So we're really clearly a domestic regional company focused around kind of the Ohio, Pennsylvania, New York area that was – has a high concentration of steel mills and our focus has been to try to serve those consumers as well as possible, and yet where we can take advantage of the price upswings created by the export demand.

All I can say is – on export is what I read just this week, that there is a pickup in export activity and hopefully with that will follow a pickup in pricing, since I need to get material to those hubs so they can send it overseas. But it's – that's all I can add to it.

Scott Blumenthal – Emerald Advisers

Okay. That's really helpful. Thank you, Carlos.

Carlos Aguero

You're quite welcome, Scott.

Operator

Your next question comes from the line of Brett Levy from Jefferies and Company. Your line is now open.

Brett Levy – Jefferies and Company

Hey, just one follow up question. I think as all of the shredders were kind of ramping up late last year, early this year, the thought was that the peddlers were being a bit overpaid because everyone was trying to fill up their shredders again. Have things sort of normalized a little bit? Do you feel like you are getting some of your margin back or does it still feel like there's kind of more shredding capacity chasing the shredders – the peddlers vehicle at this point?

Carlos Aguero

I think that there's an enormous amount of shredding capacity in the country and certainly there is some – quite a bit of shredding capacity even in some of our regions. And with the units that are being generated not being as high as historical norms, yes, people are competing more and more for those units, so it's a real challenge to maintain a buying discipline on what you pay for that scrap and what you're going to get for the end product isn't going to change a whole lot. All you can control is what you pay. So our focus and our attention is on maintaining the discipline on the buy side despite the fact that it is a very competitive marketplace out there and we think that the numbers that we have just posted indicate that we do maintain that discipline and that we do generate margins which are on the – EBITDA margins which are on the higher end of the range compared to our significantly larger peer group. So I think that we've done our job. Our operating guys, I give them a hell lot of credit. They're hardworking, they're smart, they're disciplined. They're good at what they do and that ends up showing in our results.

Michael Drury

Yeah. And Brett, keep in mind that we have a pretty significant feeder yard network that supports the shredder in Pittsburgh. So a lot of our material comes from what you might term as internal sources from that feeder yard network which allows the managers that Carlos mentioned to avoid having to chase material by having to pay us. So again, our concept of hub and spoke is successful I guess would be the way to put it.

Brett Levy – Jefferies and Company

Thanks much, guys.

Carlos Aguero

You're welcome.

Operator

(Operator Instructions.) Your next question comes from the line of Shaun Nicholson from Kennedy Capital. Your line is now open.

Shaun Nicholson – Kennedy Capital

Good morning, guys. Great quarter.

Carlos Aguero

Thank you.

Shaun Nicholson – Kennedy Capital

Just a quick question. The Youngstown – a major customer for Youngstown, I think, is V&M. They're doing an expansion. Do you know what the progress is and how big that expansion is and what you guys–?

Carlos Aguero

I don't know the stage of it. They did announce it recently and the price tag that I heard put on it was somewhere around 600 million and at a significant capacity increase. I'm not quite sure if it's doubling but it's certainly over 50% capacity increase, so it is quite substantial. And also they're in the right type of product making the oil and gas tubing that seems to be in high demand to be with all of these new shale gas plays that are being explored and drilled. So that should put them in pretty good stead and hopefully we just want to be a great supplier to them and continue to improve and increase that relationship. We think it's a very valuable relationship.

Shaun Nicholson – Kennedy Capital

I mean, is that an area of the country where you'd need to get some feeder yards or you'd look to acquire or – given the capacity increase potential over the next couple years there or do you have enough capacity right now to service that when that happens?

Carlos Aguero

We always like to get more feeder yards, that's really the name of the game. And then, get that material over to our processing yards to get the metal process and upgrade it. So we keep our eyes open for opportunities for attractively priced feeder yards in areas that are near to or adjacent to our platform locations. We'll continue to do that and hopefully we'll be successful either opening or buying additional ones.

Shaun Nicholson – Kennedy Capital

Great. Good luck, guys. Thanks.

Carlos Aguero

Thank you.

Operator

You have no further questions at this time. I'll turn the call back over to the presenters.

Carlos Aguero

Okay. As we customarily do at this point, we'll wait about 60 seconds and if no one else shows up with a question, then we'll conclude the call.

Operator

(Operator Instructions.)

Carlos Aguero

Nothing on the screen, Operator?

Operator

There are no questions.

Carlos Aguero

Okay. Well, certainly appreciate everyone's questions and participation. We want to thank you all for joining us today and for your interest in Metalico's results and developments. And we look forward to speaking with you again when we present our results of the second quarter a little bit later on in the summer here. Thank you very much. Have a wonderful day.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Metalico, Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts