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Metalico, Inc. (NYSEMKT:MEA)

Q1 2014 Results Earnings Conference Call

May 15, 2014 10:00 AM ET

Executives

Carlos Agüero - President and CEO

Michael Drury - EVP and Chief Operating Officer

Kevin Whalen - SVP and Chief Financial Officer

Analysts

Scott Huntington - Bodell Overcash Anderson

Operator

Good morning and welcome to the Metalico 2014 First Quarter Results Call. My name is [Melissa] and I will be your 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 this 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 ended at March 31, 2014.

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 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 37131959.

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 from 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 statement and a discussion of the factors that could cause results to differ materially from the discussion today, please refer to the risk factor for discussion in Metalico’s Annual Report on Form 10-K for 2013 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

Good morning and thank you for joining us. With me here today are Michael Drury, our Executive Vice President and Chief Operating Officer; also Kevin Whalen, our Senior Vice President and Chief Financial Officer. Following the call 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.

Now let's talk about the first quarter. Those of you who follow scrap metal recycling industry know that companies like ours experienced a difficult start to 2014. Metalico is no different from its peers in facing the challenges of weak commodity prices, shutter overcapacity, unsupportive export market and scrap supply that although available remains extensively priced.

Quite an expensive weather in our markets also took its toll. However, we are encouraged that despite difficult conditions our volumes of ferrous and non-ferrous metal shipments held up well, but our important metal margin remains pressured.

Our sourcing efforts have been effective bringing in scrap and keeping equipment productive and retaining market share. It's always a difficult balance between generating necessary metal margin and acquiring sufficient scrap to operate efficiently and to cover all the [headcount].

As we have said many times before, overcapacity heats up competition and affects margins. We've also been experiencing more months with downward price volatility, which negatively impacted margins. We nevertheless remained optimistic that overtime industry overcapacity will works its way out.

Now let's start by going through a recap on the 2014 first quarter results or compare to the first quarter of 2013. More detailed results and other financial information is available in today's press release and in our Form 10-Q.

In the quarter, we generated revenues of $135 million, down 2% from $138 million. On an adjusted basis, consolidated operating loss was $2 million compared to $600,000 operating profit last year. Metalico recorded a net loss of $4.2 million or $0.08 per share compared to a net loss of $1.2 million or $0.02 per share last year.

Income taxes in the current year period were negatively impacted by $1.5 million due to a recent change in New York State Tax Law. This is a one-time non-cash expense equal to $0.03 per share to write-off certain deferred tax assets. We do expect to benefit from the change as we go forward.

In the absence of that non-cash expense, our net loss would have been $2.7 million or only $0.05 per share. These numbers were slightly misstated in our original press release issued this morning, but we will be filing a correction.

EBITDA was $2.8 million, a decrease from $5.5 million in 2013. However, operations generated cash flow of $10.7 million versus $7 million thanks to more rapid inventory turnover. We shipped 3% more ferrous tons in the quarter, total of a 147,000 tons compared to $143,000 tons previous year.

Non-ferrous scrap shipments were little changed at 43.7 million pounds versus 45.2 million in last year’s first quarter. Average ferrous selling prices for the quarter rose by $25 per gross ton largely due to higher prices in January, while the non-ferrous selling prices dropped by $0.05 a pound. Average PGM selling prices were up slightly for the quarter. Minor metal performance improved with volumes rising by nearly 50% and a 16% increase in average unit sales price, principally from [Mali] sales.

We believe that once commodity prices stabilize and export markets improve, results should benefit. Obviously we cannot predict when prices will increase or become less volatile, so we will continue to focus on protecting market share, controlling expenses, sustaining volumes and most importantly we’re concentrating on moderating scrap buying prices to improve our spread.

Let’s take a summary view of operating results. Scrap Metal Recycling operations including PGMs and minor metals represented 88% of revenues, we were $118.5 million produced and produced an adjusted loss of $1.2 million before corporate overhead.

As I said earlier, we sold 147,000 tons at an average selling price of $402 per ton and ferrous represented 44% of overall scrap segment sales compared to 39% last year. We sold a total of 43.7 million pounds of ferrous scrap at an average price of $0.93 per pound. This was 43% of segment sales this quarter as compared to 48% last year.

Aluminum, copper and stainless steel products continue to be the largest base metals sold in that order. Our lead product fabricating operations turned in another positive performance. Operating income before corporate overhead was $1 million compared to $1.5 million last year.

Volume shipments totaled 9.9 million pounds compared to 10.6 million in the 2013 quarter. Average selling prices for value-added products matched up to $1.68 per pound versus $1.63 per pound. Sales volume of outdoor-related products was impacted by the weather resulting in an unfavorable product mix as compared to last year.

Moving over to the balance sheet, the company continued to generate positive cash flow helped by increased inventory turnover. We reduced outstanding debt to $116.5 million as of March 31, 2014 from $127.4 million at December 31, 2013. The decrease was principally due to the application of cash generated from operations to reduce our revolving credit balance.

The increase in current liabilities reported at quarter-end principally resulted from the reclassification of debt from long-term to the short-term. It did not meet our leverage ratio covenant as of March 31, but we obtained a waiver from our lenders. Availability under the revolver has not been affected by the waiver and business operations continue as usual.

Our ability to draw funds under the financial agreement to redeem the balance of the convertible notes in the events I reported on June 30 depends on conscience if covenants and the lenders consent. We intend to work with noteholders to reach an agreement that will satisfy their optional redemption rate. This may include extension of the purchase rate, of the repurchase rate, sales of assets, [fruitions] of new debt or equity or a combination of both.

Metalico had cash on hand of $5 million and availability on the revolver of $22.5 million at March 31. Our revolver availability fluctuates on a daily basis due to the timing of cash collections and vendor payments.

During the quarter we invested $2 million in capital expenditures, nearly the same as last year's first quarter, maintaining strict control on the capital budget. Company added [roll-up] containers for new industrial accounts, replaced cranes and added to its transportation fleet.

Meanwhile, we continue to review our cost structure everywhere as part of an effort to regain profitability in the phase of tighter metal margins. Regarding controlling of expenses, so far this year, we have reduced annualized expenses by $1.7 million mainly in the following areas. Improved operating and maintenance labor efficiencies, the consolidation of administrative and procurement functions and occupancy and insurance cost.

Our strategy is to continue building the scrap yard network in existing markets through build outs or acquisitions in areas we think will enhance our market presence. We are maintaining strategic discipline on growth prospects and keeping our options open for all opportunities as they arise. However, no build outs or acquisitions were completed during the first quarter.

Although in this past year, modest progress has been made to address industry overcapacity, we still believe that further industry consolidation is necessary to help us store competitive balance and profitability for the industry and the company alike.

Looking ahead, we expect unit volumes [sourced] and shipped will remain at or near current levels in the foreseeable future. We have already seen the upswing in seasonal volumes brought by the warmer weather and by the closure of a competitor in our Central New York State market.

Before I start on our market outlook, let me -- I want to remind listeners of our policy on guidance and forward-looking statements. Metalico's practice as is common in the industry is to not 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 earnings estimates could prove to be unreliable because of the unpredictability and potential magnitude of commodity price swings as it relates to the effect on scrap volume purchases and shipments.

Now for a word on our outlook on the market, let's start with ferrous scrap. Pricing should remain pressured until export market prices can rebound. Scrap buying prices being paid by domestic mills have been weakened by the abundant supply offered by export yards. Export scrap is normally loaded on ships and leaves the North American market.

Additionally, demand in sales prices paid for finished steel at domestic mills is dampened by imports, which amount to about 30% of our steel sales today, consequently hurting demand and selling prices for scrap generated in tier regions in the U.S. like the company, like ours.

On the non-ferrous front, copper prices have lately traded sideways within a narrow trading range, waiting for demand from China to improve. Aluminum continues to exhibit strong demand, but availability of supply has improved with the enormous spring weather, which has modestly softened trading prices. Nickel and related high temperature metal prices have continued to rise due to the strong global demand and from constricted supply from overseas sources. Generally, we anticipate base metal prices will remain flat, but may gradually improve as the U.S. and European economies continue to improve.

On lead fabricating, we see demand from many of our lead products is expected to remain steady. We anticipate that pricing will be supported by balanced supply and firm demand. Metalico therefore expects continued strength in most of the markets served by our lead fabricating operations.

In conclusion, I again offer my thanks to Metalico suppliers and consumers for their continuing business. I am also proud to recognize our employees for their diligence, their loyalty and hard work. It takes dedicated people to cope during difficult periods and for that all of Metalico management, thank you.

Lastly, to all Metalico shareholders, we will continue to do our best and understand your frustration with the results, which really appreciate all of your support.

Vanessa that concludes our remarks, so I would like to open up this call to any questions you might have.

Question-and-Answer Session

Operator

And thank you. We will now begin the question-and-answer session. (Operator Instructions). I am standing by for question.

Carlos Agüero

Okay.

Operator

(Operator Instructions). And we have a question from Scott Huntington with Bodell Overcash Anderson.

Scott Huntington - Bodell Overcash Anderson

Good morning.

Carlos Agüero

Good morning.

Scott Huntington - Bodell Overcash Anderson

Just kind of a macro thought here in a micro thing in tough environment, tough balance sheet pretty strong yet I believe and I think you’re all accounting for that. But it is what it is and I think the expense lemon is probably getting lot of squeezer as it can be. And you have inability other than kind of tuck-ins, so hamper your ability to grow at a rapid pace in a tough environment to take advantage of the consolidation that you see out there.

We noticed back in August with the [Pitster] Group, spent over $1 billion to do some bottom fishing in this industry which is kind of on the ability to [commodity] scale and I just wonder what your thoughts are when you send half a book in a tough environment, when like ahead are you being hunter is kind of weak right now? And if you had any conversations on the consolidation continuing and you then approach to look at the nice footprint that you have, that’s my question?

Carlos Agüero

Well Scott, nothing specific to report at this time. There is no existing or ongoing discussion with anyone. Firmly we understand the landscape and feel that there is the need for consolidation to take some of the overhang and remove some of the existing shutting capacity in the market. And it’s been happening but very, very slowly. And we feel that at some point fresh capital will see these opportunities and will awaken to it and will want to find a way to participate and take advantage of what we think is a good market when have those players participating. And that hasn’t happened to-date, but it doesn’t mean it can’t happen literally overnight when someone with deep pocket wakes up smells the roses and realizes that there is good opportunity there. And at that point, we will figure out what’s our best way to participate in that. But for right now, we have not seeing anything on that horizon.

Scott Huntington - Bodell Overcash Anderson

Okay. And then if I may follow up, I know that we had looked at a couple also capital raises, one was [flat] and certainly nobody wanted to (inaudible) they didn’t want to put enough gold on the table to make that advisable for the shareholders. Well, I think for I don’t know, may be six months now you’ve talked about potentially settling operations other operations that didn’t fit into the long term goal, we haven’t heard much on that. Is that anything over the next I think we can talk about six months, is that anything that is still on the table, non-strategic update is what you call?

Carlos Agüero

Those things are always on the table. Our preference would be first to deal with what we would call non-core or less-core assets or assets that have less synergy with the other operations. Obviously we’ve had open dialogue and discussions with parties along those lines. But I guess the economics have not reached the level where we felt it made enough sense to carry through it. While in the meantime we will continue to look at less synergistic assets and see if those are better opportunity for us. But you don’t know what the future will bring in terms of the economics improve, will change in some of these potential either sales or swaps or combination, we may very well take advantage of them. But right now it’s nothing that we can report on that is happening in that area.

Scott Huntington - Bodell Overcash Anderson

Very good. So in essence, the lead division, there is other opportunity is ongoing is what you are saying?

Carlos Agüero

I think it’s always out there and actually they are using more than one and question is how does it affect your business from future perspective and that is part of the evaluation process. But as I said it’s hierarchy priorities of what we should try to do first and certainly the least synergistic first and that might be sufficient to address the some of the capital issues that we talked about.

Scott Huntington - Bodell Overcash Anderson

Okay. And thanks for addressing our questions and concerns and your time.

Carlos Agüero

Okay. Thank you for your questions.

Operator

And thank you. Our next question comes from [Ruth Robinson] who is the private investor.

Unidentified Analyst

Good morning. And I feel very badly about this company right now, and it’s interesting that the analyst community has obviously forgotten about you as well. A year ago I asked the same question about the possibility of putting yourselves up for sale, and you absolutely discarded that out of hand. And as I look at the compensation package, I really have to ask you, how you can possibly have the nerve to payers of the bonus when the shareholders are dying on those lines. And it’s almost like you are running this company at a loss as somebody would run a corporation at a loss for a benefit. Can you please explain why you are not pursuing an outright sale of this company to a management that can make it work?

Carlos Agüero

Well, we -- look, nobody is saying that. Nobody has approached us and we haven’t gone into any formal process I think to the extent that someone is interested Ruth, we are public, our information is out there, everybody is aware of who we are. And to the extent that someone does determine that they want to pursue discussions, we certainly have a fiduciary obligation to listen and to try to do the best for the shareholders. So certainly if and when those opportunities arise we’ll take them very seriously; and we will enter into discussions to the extent that a party is credible and capable.

Unidentified Analyst

But that is not taking an active role and trying to sell the company. That’s waiting around for something to happen. And that’s not what I am talking about. A year ago you said well weren’t going to do that, because you had something -- some wonderful surprise waiting in the wings that was going to make the shareholders very happy. Well I don’t know what that is or was or didn’t happen, I have no idea. But I think that the shareholders have -- you have a responsibility to the shareholders to instead of just letting the company lights go out, which if you are not going to be able to pay your debt that will happen and the properties will be liquidated. And it’s just a scenario that I don’t think anybody wants to see, especially when you have the option of actively pursuing and acquirer instead of -- I understand you are saying that they all know about you and I am sure they have an opinion, but you’re little size number board of directors is like a little private club, and it seems to me that you are reluctant to do the right thing because of some comfort level that you have and that’s how it appears. And I don’t hear anything that is telling me anything differently right now. So can you address the issue of the bonus please?

Carlos Agüero

Well, I can address the fact that the management group -- there is two things, bonus in the field for people that do job on a day to day basis and bonus at the corporate executive level. No one at the corporate executive level has received a raise in over three years, so maybe that had something to do with it. So that’s the extent of which I will go into that. As far as putting the company up for sale, look we’ve heard you, we understand what you are saying, we’ll certainly take it up in our next Board meeting that we have heard a concern from a shareholder to actively put the company up for sale and we will talk to our advisors and our banks. As far as I think the lights go out, I think that’s a mischaracterization. We are paying our debt on our bills and our interest on a timely basis.

We have to make some adjustments in our balance sheet and we will try to address those. And whether that’s addressed by an asset sale or a restructuring of the debt or sale equity, it would be whatever is necessary to get the job done, before you consent and we'll certainly bring it up for further discussions. Thank you for your question (inaudible).

Unidentified Analyst

Thank you.

Carlos Agüero

Okay.

Operator

And thank you. Our next question comes from Michael Curley with (inaudible) and Curley.

Unidentified Analyst

Good morning. How are you? Good morning.

Carlos Agüero

Good morning.

Michael Drury

Good morning.

Unidentified Analyst

With all this negative news that you've been announcing, why are we not having like some sort of cut on salary for employees to reduce expenses?

Carlos Agüero

If you listen to what we said early, we said we have reduced operating expenses so far in the year by an annualized amount of $1.7 million. And honestly….

Unidentified Analyst

Yes. And that's wonderful.

Carlos Agüero

Yes. And we continue to look at areas where we can reduce and it's important cutting salaries is a lot easier than said and done, because you wouldn’t be able to retain and keep to motivate your, the folks that are out there in the field getting it done every day.

So, that would be, it could be counterproductive to do that and end up losing the folks that are responsible for getting the job done. So that's a potentially doubling story, but believe me we continue to look at areas where we can in fact reduce expenses, but most importantly what we're trying to focus on and we need those individuals that you refer to that should be cut we need them to focus on areas in which we can source scrap for less money and improve the margin. The biggest expense that any company in the scrap and recycling industry has is purchase materials. And so that is where we continue to try to focus and concentrate our efforts, so that we can improve on those spreads. So that's what we're focused on although doesn't mean that we won't continue to look at areas to reduce expenses.

Unidentified Analyst

Have you ever sort of maybe closing some non-profitable aspects of the company to reduce more expenses?

Carlos Agüero

We certainly have and we don't comment on things that we may be working on that are not completed, but certainly we are considering I think we did allude to the fact of either sale and if we are unable to settle, we would consider some of the smaller satellite operations that are not contributing doing something else with them. So the answer to your question is yes that's we looked at, as they looked at and considering those some of the areas where we have already reduced operating expenses.

Unidentified Analyst

Okay. Thank you.

Carlos Agüero

All right. Thanks for your question.

Operator

Thank you. (Operator Instructions). And our next question comes from Howard Landis who is a private investor.

Unidentified Analyst

Good morning. I have got one comment and then two quick questions. It's been a tough market, but I appreciate the ownership that you and the team have so I know you are looking out for the best interest of common shareholders. And two quick questions. Have you reached agreement with the convertible note orders with the bulk of the debt have been specifies as long-term?

Kevin Whalen

First, I'll just bring you up-to-date, you may or may not be aware of that significant amount of that the convertible note has been turned out refinanced in November and it's only a little over $20 million remained and that’s the one that we’ll be addressing that we’ll have to figure out what’s the best course of action to take on that. But two thirds of that debt has been addressed as a long-term refinance already.

Unidentified Analyst

Yes. I understand. Question is has the balance $23.4 million if you reached (inaudible) with what would the debt on your balance sheet?

Kevin Whalen

We how now reached agreement but we intend to have conversations with folks with enough time to address a resolution.

Unidentified Analyst

Okay. And approximately how many holders are there of those notes?

Kevin Whalen

Probably half a dozen.

Unidentified Analyst

Okay, great. And if you reach agreement will that resolve in a, if you reach agreement everything else that you are saying with the bulk of your balance sheet debt be long-term?

Kevin Whalen

I would think so, that would likely be the outcome, yes.

Unidentified Analyst

Okay. So, you have a waiver from your revolving credit lender and (inaudible) as of December? Okay, I think I understand. Thank you.

Kevin Whalen

Okay.

Operator

And thank you. We have no further questions in queue at this time.

Carlos Agüero

Okay, well. Hopefully, we’ve answered everybody’s questions either through our prepared remarks and if not through the prepared remarks through the insightful questions that we’ve got from our four participants. So at this time, we’re just going to move on and close the call. Appreciate everybody’s concern and certainly everybody’s opinion and want to thank you all for joining us today and your interest in Metalico’s [growth] and development. And we look forward to updating you on our next report on our second quarter results mostly likely in early August. Thank you very much and have a great day.

Operator

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

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