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Metalico, Inc. (NYSEMKT:MEA)

Q4 2013 Earnings Conference Call

March 14, 2014 10:00 AM ET

Executives

Carlos Agüero - President and CEO

Analysts

Brent Thielman - D.A. Davidson

Jonathan Roberts - Private Investor

Robert LeTourneau - Private Investor

Operator

Good morning and welcome to the Metalico Fiscal Year 2013 Results Call. My name is Christine and I will be the operator for today’s call. At this time all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period. Please note that today’s call is being recorded for transcription purposes. The purpose of today’s call is to discuss results of the Company’s operations for the year and the quarter ended December 31, 2013.

Earlier today, Metalico issued a Press Release announcing annual and fourth quarter results and filed a report on Form 8-K in connection with the release. 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 the 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 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 36705846.

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. Those risks could cause actual results for the current period and beyond to differ materially from those expressed in forward-looking statements made by or on behalf of the company. We refer you to Metalico’s periodic reports that are filed from time to time with the SEC. For a more detailed discussion 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 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 now 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. With me here today are Michael Drury, our Executive Vice President and Chief Operating Officer; and Kevin Whalen, our Senior Vice President and Chief Financial Officer. Following our comments 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.

Most of you have seen the earnings release for the fourth quarter and the full year 2013 we issued earlier this morning. We’re leaving behind a disappointing year for the scrap industry and for Metalico. We and our competitors likely face the challenging 2014 as well. Our industry continues to suffer from weak commodity prices, shredder over capacity, unsupported export markets and continued fierce competition which taken together, make for expensive scrap supply and hampered margins.

Nevertheless Metalico saw some encouraging signs in the year just ended. First, our overall scrap volumes were up as we aggressively developed new supply relationships. We retain market share in a very competitive environment, we strengthened our balance sheet with a major refinancing of most of our short and long-term debt. And finally we expanded our penetration in certain existing markets with some strategic yet low cost tuck-in acquisitions.

Now let’s start by going through a recap of 2013 annual results all compared to 2012. More detailed results and other financial information is available in today’s press release.

In 2013 we generated revenues of 530 million down 8% from 574 million. Our results led to a review of the carrying value of goodwill and other intangible assets, which resulted in a non-cash impairment charge recorded in Q3 totaling almost 39 million.

A similar review of 2012 led to a non-cash charge as well of over 19 million. These write-offs affected only goodwill and intangible assets from acquisitions and did not impact the carrying value of inventory or receivables.

The recap numbers that will follow, all exclude or in other words are adjusted for the effects of the non-cash charges in both years. On an adjusted basis consolidated operating loss was 560,000 for 2013 compared to 4.4 million operating profit. Metalico recorded an adjusted net loss of 5.9 million or $0.13 per share compared to a net income of 236,000 equal to a breakeven on a per share basis last year. EBITDA was 18.4 million, a decrease from 27 million in 2012. Operations generated a cash flow of 21.9 million versus 22.4. We shipped 7% more ferrous tons in the year, a total of 576,000 compared to 536,000 tons per previously.

Non-ferrous scrap shipments were virtually unchanged at 179 million pounds in both years -- in each year. This level of shipments is testament to our disciplined sourcing efforts and also indicates that supply of available scrap has improved somewhat due to economic recovery in the manufacturing and industrial sectors and demolition activities. Our internal analysis shows that results were principally impacted by broadly lower commodity selling prices, the tough competition on the sourcing side did not allow us to expand metal margins.

But just the same, overall metal margin spreads expanded somewhat. More specifically average ferrous and non-ferrous selling prices for the year dropped by $32 per gross ton and $0.06 per pound respectively. Average PGM selling prices were down slightly for the year while minor metal sales prices realized were off by approximately 22%. On a combined basis, our annual operating and SG&A expenses dropped by nearly 2%. This means that when you run the numbers, the reduction is income is mostly attributable to the effects that lower commodity selling prices had on the production of overall absolute dollars which are available to cover operating expenses. Expressed more simply, a 2013 scrap selling prices had remain comparable to 2012, Metalico would like not have incurred a loss and possibly would not have faced -- have been faced with the write-offs. In short, the corporative commodity prices which we anticipate and hope may eventually strengthen.

This analysis is a source of future optimism for Metalico. We believe that once commodity prices go back to 2012 levels, result of operations should similarly improve. Obviously we cannot predict when prices will increase, so we will continue to focus on protecting market share, controlling expenses and sustaining volumes and spreads until high metal prices comeback around.

Now let’s take a summary view of the segmented results. Our Scrap Metal Recycling segment including PGM and minor metals represented 86% of revenues amounting to 457 million and produced an adjusted loss of $5.2 million before corporate overhead. We sold 576,000 tons of ferrous at an average selling price of $371 per gross ton and ferrous represented 47% of scrap segment sales compared to 43% last year. We sold a total of 179 million pounds of non-ferrous scrap at an average price of $0.93 per pound. This was 53% of segment sales that compared to 57% last year.

Aluminum, copper and stainless steel were the largest base metal sold in that order. Our lead product fabricating segment turned in another positive performance in 2013, operating income was 4.6 million compared to 6.2 million last year. Volume shipped total 43 million pounds compared to 42.6 million. Average selling prices for our value added products nudged up to $1.69 per pound versus $1.56 per pound. The company benefited from a shift in product mix and new product sales which were tempered by higher raw material cost and operating expenses.

Now taking a look at the balance sheet, company had year-end cash on hand of 7.1 million, working capital after reserving for outstanding revolver borrowings finished a year at 64 million as compared to 72 million of working capital after reserving 2012 year earning. Today, we have 43.4 million drawn under our new $65 million revolving credit facility, giving us more than enough liquidity to run our businesses.

Cash flow from operations was nearly $22 million compared to 22.4 million for 2012 and shareholders' equity fell to 147.2 million from 180.5 million at the prior year’s end principally due to the noncash impairment charges mentioned earlier.

In 2013, Metalico invested $10.5 million in capital expenditures, compared to $23 million in 2012 while our debt after payments and/or refinance cost fell $3 million to 127 million. The Company made improvements at each of its shredders and replaced cranes, trucks and shears, and made other equipment purchases and building improvements. We also purchased 47 rail cars in July bringing our fleet total to 143 cars at year end. And we added 60 more rail cars this quarter.

The freight savings are considerable, but more importantly we now have much more control over our rail transportation. In addition, we continue to upgrade and automate our information technology systems. So, today we can be long transactions companywide with only a few seconds delay.

Quicker access to financial information allows us to adjust our buy prices to a rapidly changing market condition. During the year Metalico further consolidated back-office administrative functions and worked on reducing operating cost despite our higher volumes. We instituted programs to accelerate the collection of receivables and increased inventory terms thereby lowering our overall levels of inventory.

On the growth side, we successfully expanded our footprint in Western Pennsylvania and upstate New York with a few strategic low cost moves. In February, we opened a recycling facility in Conway PA, 16 miles north of our Pittsburgh shredder providing further penetration into the local scrap market and augmenting the company’s scrap flow in a strategically desirable market.

In July we acquire additional sites in Warren, Pennsylvania and Olean, New York with our purchase of the assets of Segel and Son, the oldest scrap metal recycling company in the region with customers in more than 15 counties in northwestern Pennsylvania and southwestern New York State. And in December, we acquired Furlough's North East Auto Salvage Yard outside of Erie, Pennsylvania. This location along with the new one and only facility provides a steady, flow of feedstock to our Buffalo shredder which regularly -- while regularly recovering automobile converters, lead acid batteries and aluminum range.

We have said before that our strategy is to concentrate on building this scrap network through acquisitions or build outs into areas that we think will enhance our presence in our markets. We are maintaining a strategic discipline on growth prospects and keeping our options open for all opportunities as they arrive. Company always has a number of locations on the review or in discussions to grow and protect our market share.

Over in the past year, longest progress has been made to address overall industry overcapacity, we believe that further industry consolidation is still necessary to help restore competitor balance and profitability in general.

Before I start out on our market outlook, I wanted to remind listeners of our policy on guidance and forward-looking statements; Metalico’s practice has [indiscernible] in our industry is not to provide guidance and earnings estimates; nothing we say today should be interpreted as earnings guidance; the scrap recycling industry is highly cyclical and commodity metal prices regularly fluctuate widely; we have consistently stated that the earnings estimates could prove to be unreliable because of the unpredictability and potential magnitude of commodity price swings and the related effect on scrap volume shipments.

Now, a few words on our outlook for the market. First, during 2013, we successfully defended the market share of our core scrap recycling operations, evidenced by growing unit shipments of both ferrous and non-ferrous metals when compared to 2012. Despite the disruptions caused by increment winter weather in the northeast, we anticipated maintaining annual scrap volume shipments consistent with what we did last year.

Looking ahead, we expect to participate in continued moderate economic improvements in the manufacturing and industrial sectors as they occur. Let's take a closer look by category, by metal category starting with ferrous scrap. After a strong start in January, domestic ferrous scrap prices have weakened considerably due to a lack of export demand creating excess scrap supply for domestic ferrous to [indiscernible] and choose from. The U.S. fuel industry is still plagued by significant competition from imported steel which tempers demand for scrap metal. Nevertheless we expected both export and domestic demand will be sufficient to start benefiting scrap prices by midyear.

Turning to non-ferrous scrap, first aluminum. Aluminum demand in particular should remain very solid for some time as its use in cars and truck continues to grow. Demand for and the price of DeOx is currently robust but could damp in as winter turns to spring and more metal units become available. Copper prices have been in a soft patch lately and given weakened demand from China, the world’s largest consumer of the metal, copper should remain in over supply resulting in lower trading prices for some time.

Prices for nickel, a key ingredient in stainless steel, have firmed recently after trading sideways since mid-2013. The market for nickel and consequently its price has been soft due to oversupply and high inventory. Despite recent ban from certain exports in Asia it may be deferrable for the price of stainless steel to hold its recent gains because there will be new nickel ore mines pending that will open this year.

And in lead fabricating, we anticipate demand from many of our lead products will remain steady. Pricing should be supported by a balanced supply and firm demand. For this reason we expect continued strength in most of the markets served by our lead fabricating operation. The outlook for our markets and Metalico has also been impacted by a severe winter weather, January 2014 came out of the gate with rising commodity prices which were dampened by many days of winter weather throughout our market area and it’s still today causing disruptions. The weather has reduced revenues by disrupting delays and on many days outright shutting down several of our operations.

At times, truck and rail transport came to a virtual halt. We suffered 28 days of loss -- 28 lost production days throughout our production facilities including those located in Alabama, [indiscernible] Texas and elsewhere. Scrap purchases were suppressed and equivalent was frozen and suffered cold weather related scrape downs.

I again offer our thanks to Metalico’s suppliers and consumers for their continuing business. I’m also proud to recognize our employees for their diligence, loyalty and hard work. This winter has been particularly harsh in the Great Lakes corridor where many of our facilities operate. Takes dedicated people to cope with these conditions and I thank them for all their efforts. Lastly but certainly not least, all of us at Metalico acknowledge our investors and shareholders for their continued support.

This concludes our prepared remarks. Christine, I’d like to open the call up for any questions we might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from Brent Thielman from D.A. Davidson, please go ahead.

Brent Thielman - D.A. Davidson

Hi, good morning guys.

Carlos Agüero

Good morning.

Brent Thielman - D.A. Davidson

Just thinking about the early part of this year, you mentioned you expect volumes to be kind of consistent with last year. I know you don’t provide quantitative guidance but could you kind of comment on the impact to margins in order to get that volume and kind of particularly considering the weather in the northeast here lately.

Carlos Agüero

I assume you’re referring to this year so far, what we have we’ve seen so far this year is we'll say below average inbound volumes likely impacted by the weather and certainly some of the shipments that we would have liked to have made and we were ready to make were affected by truck transportation not being available, highways being shut down and some of the rail delays that again were related to weather, so undoubtedly weather has had an impact on both the inbound as well as the outbound and commodity prices in general have been soft so we have worked diligently to adjust our buying prices in line with the changes in market conditions, so we’ll wait and see what overall impact that has on the metal margins.

Brent Thielman - D.A. Davidson

Understood, on the growth initiatives and kind of the pipeline of potential new locations, are all of these within your existing geographies or near your platforms or are you looking outside of those reasons as well?

Carlos Agüero

No, we’re strictly right now looking within our geography and those that are contiguous or close enough to feed and take advantage of our synergies with existing facilities. So we’re now looking into let’s say new geographic areas at this time.

Brent Thielman - D.A. Davidson

And most of these would be kind of feeding yards as you said.

Carlos Agüero

Buying centers and feed shredders and all the processing centers.

Brent Thielman - D.A. Davidson

Okay, great and then could you provide any help with kind of what you’re budgeting, for interest expenses this year just given the refi, the repurchase, the converts you’re planning on and so forth.

Carlos Agüero

Well that -- the total interest, obviously the rate is going to be up over last year but the over interest expense will depend a lot on our outstanding borrowings under the revolver which we’re working very hard to turn our receivables over quicker and collect our money so that our -- they are -- balances are down and our borrowings are down, so I think what you can do is look at last year's and then adjust it for the percentage change on the long term borrowings which is about 2 to 2.5 percentage points.

Operator

Thank you, our next question comes from Jonathan Roberts who is a private investor. Please go ahead.

Jonathan Roberts - Private Investor

I just wanted to congratulate you on another stellar, excuse me, I mean it’s a pretty disappointing and dismal quarter. I am just wondering what is the company planning on doing to contain its costs. I noticed that both Carlos and Michael, each are receiving a significant compensation, while not performing consistent with that compensation.

Carlos Agüero

Okay, I can tell you that we've been able to maintain and contain our costs pretty much in line with prior years and in fact lower. We don’t comment on any individual persons’ compensation, I don’t know if that is the purpose of this call. But I can tell you that for one thing that there has been no changes to compensation or salaries here in the last couple of two, three years. So we will maintain those lines, so hopefully that gives you an insight into your question.

Jonathan Roberts - Private Investor

And also over the past couple of months, have either you Carlos or Michael sold any shares in the company, any of your shares?

Carlos Agüero

No, we're under the blackout period.

Jonathan Roberts - Private Investor

And this sort of is for those ground hog day type of situation from last year’s conference call, and I am wondering if this year, I know that -- it just does not -it appears that next year as well is going to be very much the same conference call as we had in the past two years so far. Is there anything that you could sort of shed light on that will provide some hope to the shareholders of this company which has been for the past seven years, it’s been a very-very-very disappointing start at the hold.

Carlos Agüero

For you and us both, Jonathan but, if you’ve listened to anything we’ve said earlier in the call what we said is that we had sustained or protected our market share in a difficult environment we had kept our volumes up and that the commodity price environment which we have no control of went down and that is largely the reason for the lack of profitability. We contained our cost, we maintained our volumes, but we don’t control commodity prices. When commodity prices were higher as in 2012 the results were better. So I think that what we are trying to illustrate is that commodity prices have a lot to do with the results and the volatility certainly doesn’t help.

Jonathan Roberts - Private Investor

But doesn’t the company hedge its -- hedge these types of situations in the fluctuations in commodity prices, to protect it from these losses?

Carlos Agüero

It’s not losses, its lower absolute dollars produced. Let me try to explain it differently. When you are selling a commodity at $400 a ton and you have a 20% margin, you’re going to generate an $80 gross profit margin on that ton. When you sell the same commodity at $300 a ton and it’s the same 20% margin, your absolute dollars produced are going to be $60. So even though your margin didn’t change, your absolute dollars that are generated to cover your operating expenses are substantially lower because the level of selling prices are lower. And that is what we have tried to communicate today is that that is one of the big reasons for the results.

Operator

(Operator Instructions). Our next question comes from Robert LeTourneau, who is a private investor, please go ahead.

Robert LeTourneau - Private Investor

Good morning gentlemen. A couple of items. Has there been any consolidation in your industry in the area that you work in other than your own acquisition, does anybody else been out buying other scrap recyclers?

Carlos Agüero

Robert, there has been very little recent activity of any significance in the industry and in our market areas. There have been a couple of small operators here and there that have shut their doors because they were not able to make it. But there has been a few small acquisitions not enough to have taken the extent of overcapacity out of the system.

Robert LeTourneau - Private Investor

Okay thank you. Next question, previously you had explored selling the lead fabrication operation, although that has been the most profitable part of the business, and I am sure you want to go ahead, but what happened to those efforts?

Carlos Agüero

We went through the entire process. We received some indication of the interest. We looked at the values that were being offered versus what we thought the business was valued at and versus what it was generating and determined that it was better to hold on to it because we didn’t think we were realizing the value that it was worth. At this point we have not put it back on the market, we’re not going through any such process and we continue to work on trying to make the business grow and be more profitable.

Robert LeTourneau - Private Investor

Okay, one last and feature question maybe, recently pronounced effort to reduce the sulfur and gasoline somewhat maybe sooner than what they did in diesel fuel. [Indiscernible] that would increase your demand or recycle [indiscernible].

Carlos Agüero

Honestly I don’t have an answer for you on that, that’s a technical question, more for engineers to determine whether the sulfur gas would require a change in catalytic convertors and the way I would answer it though is to say that even if the new regulations as they come out do require change, those convertors would not be seen in the recycling stream for years to come until those cars are ultimately recycled or basically junked, so it would be many years before we would see that impact into the flow of our business.

Robert LeTourneau - Private Investor

Right and recycling was fair but it would initially increase the demand or…

Carlos Agüero

The catalyst, it might, I don’t know, that’s what I’m saying that’s a technical engineering question, we don’t know if it would increase or it would decrease that’s for the big auto companies to figure out, we don’t really have an answer for you on that.

Operator

Thank you, we have no further questions at this time.

Carlos Agüero

Okay, well, being that we have no further questions then we should move to conclude the call. I just want to thank everyone for joining us today and for your continued interest in Metalico’s results and we certainly look forward speaking with you again when we review the 2014 first quarter results which we expect will be sometime around the first week of May. Until then, stay well, stay warm and thank you for participating on our call today.

Operator

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

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