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Metalico, Inc. (NYSEMKT:MEA)

Q3 2010 Earnings Call

October 29, 2010 10:00 am ET

Executives

Carlos Aguero - Chairman of the Board, President, CEO and Director

Michael Drury - EVP & Director

Analysts

Richard Paget - Morgan Joseph

Eric Glover - Canaccord

Brent Thielman - D.A. Davidson

Matthew Lerner - Platts

Gregory Macosko - Lord Abbett

Operator

Good morning, my name is Sandra and I will be your operator for today's call. At this time I would like to welcome everyone to the Metalico 2010, third quarter results call. All lines have been placed on mute to prevent any back ground noise. After the speaker remarks there will be will be a question-and-answer period. I would like to remind you that today's call is being recorded for transcription purposes. Our purpose of today's call is to discuss the result of the company’s operations for the quarter ended September 30th, 2010.

Earlier today, Metalico issued a press release announcing third 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 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 630-652-3042 for the first week after the call's conclusion. To access the recording, callers will be required to enter the conference identification number of 28184786.

As is customary, let me reiterate the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following discussion contains forward-looking statements that are subject to risks and uncertainties including those risks set forth in Metalico's filings with the SEC. These risks could cause actual results for the current period and beyond to differ materially from those expressed in the 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 the forward-looking statements and a discussion of the factors that could cause results to differ materially from the discussion today, please refer to the risk factor discussion and Metalico's Form 10-K for 2009, which is also available online.

In addition, during the course of this conference call, certain non-GAAP financial measures maybe 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. Please go ahead.

Carlos Aguero

Good morning and thank you for joining today's call. With me here today is Michael Drury, our Executive Vice President. Following the presentation, we'll be available to answer any questions. We will also post a transcript of our remarks and the question-and-answer session on the Metalico website when the transcript becomes available after the call.

This morning Metalico released financial results for the third quarter of 2010 showing improvement in sales, revenue, operating income and EBITDA as compared to the same period in 2009. The results also show improvements over the second quarter 2010 in operating income, EBITDA and net income even with the small decline in sales. This marks our third consecutive period of increase in net income since the declared end of the economic crisis.

Let’s go to quarter’s highlights compared to 2009. Sales increased 50% to 137 million, an increase of $45.5 million or 91.5 million reported. EBITDA rose 22% to 13.8 compared to 11.3, operating income increased 25% to 9.6 million compared to operating income of 7.7. Net income was 4.5 million or $0.10 per diluted share compared to adjusted net income of 2.7 or $0.08 per diluted share. The prior year’s reported net income of 5.1 million or $0.12 benefited from one-time gain, net of income taxes and fair value adjustments totaling $2.4 million representing $0.04 per share compared to a benefit of $168,000 for similar items that occurred in the current quarter.

Unit volume shipped increased 14% for ferrous scrap and 34% for non-ferrous scrap. Platinum group metals, PGM’s unit volumes increased total 32% and product shipments decreased by 15% however operating income in the lead segment increased by 57%. The company’s scrap metal segment generated 8.6 million in operating income in the quarter compared to 7.8 million last year. The lead fabricating segment generated 1.1 million of operating income compared to 700,000 in the prior year and 15% fewer shipments.

Compared sequentially with the second quarter of 2010, sales declined slightly but most measures of operating performance improved. Sales of $137 million decreased 5% from 144.6, EBITDA increased 29% to 13.8 from 10.7. Operating income increased 43% to $9.6 million from 6.7. Net income of $4.5 million increased slightly from net income of 4.4 million which had benefited by a $2.1 million financial instrument fair value of adjustment.

Unit volumes shipped increased 16% for ferrous scrap and 1% for non-ferrous scrap. PGM unit volumes purchased and shipped fell by 13 and 19% respectively. Lead fabricating segment operating income improved substantially on a 2% reduction in product shipments. Compared to last year, interest expense fell by 4.8 million while total debt increased $9.7 million since last September, reflecting lower borrowing costs under our new revolving credit facility.

Metalico’s networking capital increased by $26 million to 99.5 million since the beginning of the year. Today’s availability on a revolver stands at approximately $24 million. Capital expenditure for the quarter was 1.3 million compared to 2.5 million. We utilized 1.1 million for the scrap metal recycling segment and 200,000 for the lead fabricating thing. The additions was primarily for cranes, trucks and aluminum furnace upgrades.

As of September 30, Metalico has approximately 46.5 million common shares issued in outstanding, our shareholders’ equity increased by 15 million to 165.3 million as of the date from yearend of 2009.

Let’s breakdown the quarter and as usual, starting with the scrap metal segment first, scrap segment sales were $120.3 million, up 62% from $74.3 million posted in the third quarter of 2009. We derived 36% of our scrap revenue in the quarter from ferrous and 64% from all non-ferrous metals which include the PGMs.

Operating profit for the scrap segment rose to 8.6 compared to 7.8 in the same quarter last year. Year-over-year, we saw a 35% increase in our average ferrous price to $363 for gross ton, up by $94 compared to an average of $269 per gross ton, that’s compared to second quarter ferrous pricing fell $29 per gross ton. The average selling price of non-ferrous scrap in the quarter was $1.20 a pound compared to $0.98 per pound last year and $1.11 per pound in the second quarter of this year.

We realized an average PGM selling price of $986 per troy ounce compared to last year’s $707 and our second quarter selling price average of $1122 per troy ounce. Metalico’s volume of metal sold for the third quarter included a 119,700 gross tons of ferrous scrap to the 14% increase over the 105,000 gross tons sold in Q3 of 2009 and a 16% increase sequentially.

We shipped 36.6 million pounds of non-ferrous metal in the quarter, a year-over-year jump of 34% from this 27.3 million pounds last year and a small increase over this year’s second quarter.

Aluminum, stainless steel, nickel-based alloys, copper, brass, tungsten and molybdenum continue to be the primary contributors to our non-PGM volumes. The companies sold 31,400 troy ounces of PGM in the quarter, which was 32% more than last year but 19% less than the second quarter of this year primarily due to shipping delays.

Now let's look at the lead fabricating segments. In this year's third quarter we generated sales of $16.7 million compared to $17.2 million last year. Lead product have accounted for approximately 12% of our total sales year-to-date. We generated operating income of $1.1 million compared to operating income of $700,000 for the third quarter of last year on 15% less units shipped.

Demand in market, such as medical treatment facilities, diagnostic of therapy equipment and the nuclear pharmacy industry continues to improve. The average lead products selling price was $1.33 per pound in the quarter compared to $1.17 per pound last year and $1.42 in this year's second quarter.

Volume fell just 2% sequentially to 12.5 million pounds and was 15% lower than last year. In last year's quarter we had benefited from the strong market for ammunition related products although that demand fell off shortly thereafter.

The third quarter results like those of the second quarter are evidence of our assets to reduce borrowing cost, controlled operating and overhead cost and to focus on profits over size.

Now a word on guidance and the forward-looking statements. Metalico’s practice like many others in our industry is not to provide guidance or earnings estimates. The scrap recycling industry is highly cyclical, commodity metal markets are often very erratic. We believe that earnings estimates could be unreliable because of unpredictability, the duration and magnitude of commodity pricing.

Now for our third quarter recap and market outlook. During the third quarter ferrous scrap selling prices and related domestic steel demand decreased slightly while buy prices moderated and showed stability in the midst of fierce industry competition and a tight scrap generation environment. Non-ferrous volumes remain firm while prices rose modestly. The slow industrial demolition and obsolete scrap generation rate combined with the recovering US and global metal demand should provide a favorable scrap price environment during the first half of next year.

Breaking down our outlook by product category; ferrous scrap, we believe after a small price correction early in the fourth quarter industry expectation are for ferrous pricing to stabilize and slowly go up towards year end. Domestic mills will likely curtail melting schedules in the fourth quarter which should be offset by tight supplies of many grades of prime scrap.

Our non-ferrous scrap, non-ferrous commodity pricing should likely be firm to rising for the remainder of 2010 and into 2011. Volumes purchased and sold should be slightly lower reflecting normal seasonal fluctuations, characteristic of the slowest quarter of the year. Demand for non-ferrous scrap particularly aluminum and copper remains strong as diminished supply and strong export markets continue to pressure available scrap.

On the aluminum dioxide, demand is moderating along with recent declines in steel production. Selling prices have been rising due to a higher demand from aluminum product manufacturers and continued scrap supply. Declines in steel industry capacity utilization in the fourth quarter could be offset early 2011 and provide ongoing support for the deox prices.

Moving on to PGM, pricings of PGM should positively influenced by continued weakness in the US Dollar and expanding regulation as well as demand for precious metal industrial from industrial and increased global ore production. Particularly with Palladium, we anticipated depletion of inventories and growing utilization could result in shortages that could cause prices to rise further amidst increased volatility.

We plan to increase our material processing and shipments during the fourth quarter. Historically, as PGM prices rise, more material comes to market. However, increased prices also attract increased competition. On the lead fabricating side and Metalico's segment expects to build upon its good quarter successes in penetrating new markets, introducing new value-added products and continuing improvements in operating efficiencies. Our lead scrap purchase and refining program is generating increased yields and continues to help lower our average cost and improve our competitive position.

Metalico results reflect the high quality of operation and define men and women, consistently execute and perform in an environment marked by price volatility and constantly changing conditions. I want to applaud all of our employees for their commitment to safety, to hard work and dedication to making Metalico better.

We focused on growth through acquisitions and investing in organic development. More recently we are seeing increased M&A activity and attractive acquisition opportunities are again becoming available. We plan to continue participating in our initial consolidation conditions.

Finally we look ahead to the fourth quarter and to 2011, optimistic that market conditions will be stable and that the economic recovery will continue to gain momentum.

This concludes our remarks, and with that operator I like to open the call for any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operators Instructions). The first question is from Richard Paget from Morgan Joseph. Please go ahead.

Richard Paget - Morgan Joseph

I wondered if you could talk a little bit more about profitability in the lead segment. I mean, I know you mentioned there are some new product lines, and you're increasing plant efficiency. But, on these volumes doing over $1 million, is that a trend that can be sustainable? Was there any kind of one-time benefits in there? Just trying to get a sense of how we should look at that particular segment going forward.

Michael Drury

Listen there were no one-time benefits in the number. I think the number is reflective of as we've discussed in the past, an effort is to move into more value-added products and we are seeing some success there, and we expanded our services into new industries such as the nuclear pharmacy industry. Our expectation is that we'll continue to see continuing improvement in results but of course there's no guarantees there but we are very optimistic in the outlook for lead going forward.

Richard Paget - Morgan Joseph

And then just with the tax rate a little bit higher than usual, wondered if you could explain that and then give us a sense of what tax rate we should be using going forward?

Carlos Aguero

Richard, if you look it, the statutory federal rate is 35%, and then you have a blended state rate of, call it to 3% to 4%. So we're somewhere in 38%, 39%, maybe 40% rate depending on issues that come up at the changes in deferred tax assets or liabilities. So, 41% may be a little high, but 38% is probably a good number.

Richard Paget - Morgan Joseph

And then finally before I get back in queue, what was the cash balance at the end of the quarter?

Carlos Aguero

It was roughly $5 million; I don’t have it front of me but, $4.3 million. Sorry.

Operator

Thank you. The next question is from Eric Glover from Canaccord. Please go ahead.

Eric Glover - Canaccord

You mentioned that Platinum Group's volume shipments were lower sequentially in the quarter due to timing issues. I was wondering if that was something that you did intentionally or are there some other factor there?

Michael Drury

It wasn’t intentional. We had some issue late in quarter with getting trucking when we needed it to get some material after-market and that was the issue.

Eric Glover - Canaccord

Can you quantify what amount of shipments were held back in the quarter?

Michael Drury

It was about 2,600 ounces.

Carlos Aguero

More than those.

Michael Drury

Yes, it went to 2.5, 2.7 in revenues. And it wasn’t held back, it just didn’t get out.

Carlos Aguero

The truck didn’t get to the docking time or actually the truck.

Eric Glover - Canaccord

And then just looking at the ferrous business, I was impressed by the shipment volumes there. Was that your ability to ship more to exporters in the quarter or what was exactly driving the strength there?

Carlos Aguero

There was a little bit of export, but really we are still focused on the domestic market. The bulk of our shipments are still in the, let's call it the Ohio Valley and not necessarily exports, so it’s really is just more of the same and no change to our prior patterns of being primarily domestic oriented.

Eric Glover - Canaccord

It sounds like the domestic mills are going to be buying a bit less scrap in the fourth quarter. So is there a potential for you guys to increase your shipments to the exporters if the demand is there?

Carlos Aguero

It depends if the market is available and you have to bear in mind given our locations to get to the port is a fair amount of freight cost, so the export market have to be high enough to be able to contend with the higher cost of getting it out to the ports. So we’ll just have to wait and see but we are now trying to predict one way or the other which way that's going to go. But we do expect probably we will see lower shipments in the quarter just because of the domestic industry primarily.

Eric Glover - Canaccord

And finally, SG&A seems to be bouncing around a bit here. Should we assume about $6 million for the December quarter?

Michael Drury

That’s probably a pretty fair number, Eric

Carlos Aguero

Yes (inaudible), plus or minus 5% probably

Operator

(Operator Instructions). The next question is from Brent Thielman from D.A. Davidson.

Brent Thielman - D.A. Davidson

I guess a larger player in the market had talked about using that sort of September quarter as sort of a buying opportunity in front of a supply tight Q4. I'm just wondering, do you have much carryover maybe in lower costs and into where we're heading to this fourth quarter as we see scrap prices improve? Just trying to get a sense of margin expansion potential.

Carlos Aguero

Well our inventory didn’t change much at all from the prior quarter, we feel that once again we are in pretty good shape heading into the fourth quarter to have ample inventory in all of the categories that we work to be able to meet market demand, so we think we are in good shape and the costs are adequate to be able to generate expected profits on it.

Brent Thielman - D.A. Davidson

Just thinking about your internal target of 10% EBITDA, is that sustainable on a quarterly basis if we do see ferrous prices at current levels?

Carlos Aguero

Well we believe it is and if you look historically we have been able to generate that. We’re there year-to-date and prior periods other than the dislocation of the current prices we all had a while back, we are maintaining or exceeding that number, so that is our internal target on a consolidated basis and we certainly expect that not every quarter, but on an ongoing cumulative basis, we would be able to meet or exceed that

Brent Thielman - D.A. Davidson

I guess there does seem to be a fair level of pessimism among the domestic mills right now. And I just wanted to sort of look ahead and look for acquisitions. Is it more focused on supporting some of those big exporters? Or how do you look at your growth strategy there to sort of?

Carlos Aguero

No our strategy is not geared towards supporting large exporters, it is geared to supporting as much as we can market conditions being what they are and supporting the domestic markets because of geographic location of most of our facilities were much nearer to the mini mills and to the integrated in the Ohio valley, so that’s really our focus.

Operator

The next question is from Matthew Lerner from Platts.

Matthew Lerner - Platts

In terms of acquisitions, I'm lead to believe that asset valuations right now are fairly expensive in everything from iron ore to copper. When you look at targets, what are you seeing in terms of valuations? Are assets expensive now?

Carlos Aguero

Well, it depends on region by region and depend on the dynamics of the market place, I would say that generally speaking, the valuations have not come down to what we would have expected, but they have moderated and the expectations or so have moderated and that particularly in areas that we want to grow. We believe that there are some interesting opportunities that are out there that are available and we'll work on those to see if we can make some of those happen.

Operator

(Operators Instructions). The next question is from [Earl Cornett] from ABC Consulting. Please go ahead.

Unidentified Analyst

I notice that manufacturing has improved for 14 straight quarters. This should be good for Metalico in acquisition of raw materials. Are you seeing that a bit?

Carlos Aguero

Well you know the flow into the yards has not recovered to levels before the downturn. There are pockets of strengths in some of the areas where we operate, but I wouldn’t say that it blankets for all region. There are areas that are slower than others, there are products that are not in demand as much, for example construction products and the steel industry are weak while some products in the tubing and oil and gas industry are very strong and while certainly automotive is improving somewhat.

Appliance demand because of lack of construction and the weak housing market doesn’t seem to be improving that much. So I would say it’s more of a mixed picture than it is wholesale improvement across the whole economy. The foundry business seems to be very busy, but they tend to be more specialized in the scenario such as heavy construction equipment and mining equipments in the like which are all doing very well.

Operator

The next question is from Gregory Macosko from Lord Abbett. Please go ahead.

Gregory Macosko - Lord Abbett

You mentioned the shipping delays. Was it only the PGM area? Was there anything else that saw any delays?

Carlos Aguero

There was a little bit on the ferrous side that didn't meet the cutoff requirements that will fall into the fourth quarter, but it wasn’t significant, it may have been 1,000 tons or so, but it wasn’t a huge item.

Gregory Macosko - Lord Abbett

And so all of those shipments just to kind of the next quarter, you didn't lose any sales as a result.

Carlos Aguero

Right, carry them over to the next.

Gregory Macosko - Lord Abbett

And then you talked about the customers in the Ohio Valley and shipping there and not really exporting. Could you talk about this review for me how the relationship works for the mills and the contracts and the like? Are you basically shipping to them on a sort of as-needed or as-requested basis, and doing it at a kind of price defined maybe by a market index or anything like that?

Carlos Aguero

Well we're doing it basically on a monthly purchase order. We talk to each of the mills on monthly basis and we agree on a price, and that price stays firm for the entire month. Occasionally, you'll have instances where mills will step up in mid month and will be looking for additional material and we'll negotiate a separate purchase order on that, and that’s pretty much a way it works. It's usually a monthly purchase order and occasional mid-month requirements also.

Gregory Macosko - Lord Abbett

And how much kind of negotiation is involved? I mean, is there really a lot of sensitivity relative to movement in your price?

Michael Drury

The mills publish a price monthly and each supplier then determines what volume they want to ship against their price. There may be some minor adjustments for transportation but pretty much everyone regardless of size ships again for same pricing. It’s not a specific negotiation supplier by supplier.

And just clarifying the other point, if the domestic ferrous market were to be significantly impacted were much slower than it is today and the export markets I am sorry were strong, we wouldn’t hesitate to ship domestically. I'm sorry we wouldn’t hesitate to ship exports. We chose to support the domestic market when the pricing is comparable to the export market unlike some of the big companies’ better old business here to export. So there's a choice but its choice that the economic conditions on favorable domestic markets we will go export hence to chase the highest revenue available to us.

Gregory Macosko - Lord Abbett

I understand. But back to the steel mills then, at the published price, if there is 120% of volume to ship at that price, what happens? It's all prorated as to the amounts among them? How is it determined what volumes are shipped by the various suppliers that are offering to ship?

Carlos Aguero

Once the mill is established what they are willing to pay for that month for the different grades of scrap then they would take orders from the different suppliers to meet their demand and then might be and they may have five suppliers, 10 suppliers, whatever it is and they will buy a small amount from each. Well it be a 1,000, 5,000 tons from each until they have purchased allotted quantity that they are looking for to melt that particular month or to add to inventory. So they determine the price, they determine the overall purchasing, and then they start talking to the suppliers and see who has what available and is willing to sell at that price or not, and they’ll buy until they have met their requirements and then they stop, abruptly stop for that month.

Gregory Macosko - Lord Abbett

But the point is that they determine the share that given everybody, there's a lot of availability there and they pay that price, they determine your share or whoever's share based on what its been in past?

Carlos Aguero

Not necessarily. A lot of times it’s almost the first come, first serve too. So there is a lot factors that go into. It not just out here and say we are going to buy 10,000 tons and we are going to break it up and everybody is going to get 10% or 20% of it. A lot of times its, they come up with the price and we are contacting them, you say I can 5,000 of what your needs are and if you're there, and you take the order, and you are in good shape, and if you happen to be the last one to call or to be in contact with the mill, and they have already met their requirements, then you are out of luck and you won't be able to sell to that mill that month

Gregory Macosko - Lord Abbett

And are the deliveries then staged over the month?

Carlos Aguero

Yes, yes, they are definitely staged out over the month.

Gregory Macosko - Lord Abbett

And the point, and then just thinking about those customers today, the point I sense is that their inventories are pretty full or in good shape and so that the likelihood given some mill volume decline say in the fourth quarter, they would buy less.

Carlos Aguero

Every mill has their own strategy how they want to pursue their inventory practices and a lot of it depends on their order book, other is whether they have a maintenance schedule coming up or what have you and whether it have a lot of on the ground or not, or companies establishes their own buying strategy and follow that through the course of the month based on their particular issues whether they are busy or not, whether they have downtime or not and whether they have a lot of inventory or not, those are the main factors that would go into it.

Gregory Macosko - Lord Abbett

And finally how is Youngstown going?

Carlos Aguero

Going fine.

Gregory Macosko - Lord Abbett

What's the volume? I mean, is it at sort of buy, I mean normal capacity or volume, or that you would expect? It's all kind of up and running?

Carlos Aguero

Its operating as we expected it would operate when we purchased it. Then certainly no change there in terms of our expectations versus the way that it's operating.

Operator

(Operators Instructions). At this time there are no further questions.

Carlos Aguero

Operator, we'll give it the proverbial 60 second timeframe to see if any other questions arise and if not then we'll conclude the call.

Operator

(Operators Instructions). And there are no questions at this time.

Carlos Aguero

Okay, very well. We just want to thank all of you for joining us today on our call and for your continued interest in Metalico and its results and developments. And we certainly look forward to speaking with you again when we present our results for the year 2010 in the fourth quarter which should be sometime in March of 2011. And until then be well, be healthy and be safe. Good bye.

Operator

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

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