Metalico Inc. (NYSEMKT:MEA)
Q2 2014 Results Earnings Conference Call
August 13, 2014 10:00 AM ET
Carlos Agüero - President and CEO
Michael Drury - Executive Vice President and COO
Kevin Whalen - Senior Vice President and CFO
Alyssa Johnson - D.A. Davidson
Good morning. And welcome to the Metalico 2014 Second Quarter Results Call. My name is Vanessa, 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 today’s call is being recorded for transcription purposes. The purpose of today’s call is to discuss the results of the company’s operations for the quarter ended at June 30, 2014.
Earlier today, Metalico issued a press release announcing second 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 Homepage 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 37710650.
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 those discussed today, please refer to the risk factor discussion in Metalico’s annual report on Form 8-K for 2013 which is also available online.
In addition, during the course of the 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 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.
Welcome. Thank you for joining us this morning. 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 my remarks, we will be available for questions. We will also post a transcript of our remarks along with the question-and-answer session on our website when the transcript becomes available after the call.
As reported earlier this morning, Metalico was profitable for the second quarter, driven by a significant non-ferrous volume increase in the Scrap Metal segment. Continued discipline scrap buying positively impacted the quarter resulting in rising metal margins. Our ongoing cost control efforts also favorably impacted operating and SG&A expenses.
Lately, we have discussed industry over capacity, weak export market and tight scrap supply a challenges to earnings. While we will always face competitive pressures for sourcing scrap, we do see improving steel mill demand and a strengthening export market in the period.
In addition, we are seeing signs in our market that competitors are setting more rational scrap buying prices at levels design to cover expenses and generate profitable margins. This is a positive development for our industry that is certainly long overdue.
As this practice expands and takes hold, it is likely to boost industry performance. As also as recent anecdotal evidence of further capacity rationalization by the shutdown and/or combination of competing scrap facilities in selected markets.
Now let’s move on and cover some particulars for the second quarter. Ferrous scrap selling prices soften during the period, but changes were small and predictable reducing the impact of volatility.
We sold scrap at an average price of $388 per gross ton, $14 per ton less than the first quarter. We shipped 148,000 gross tons, which is higher than both the prior year period and the first quarter.
Our non-ferrous average selling price was down by 5% to $0.88 per pound from $0.93 per pound in the first quarter, almost entirely due to a change in mix of metals sold to more aluminum products. Unit's volumes jumped to our highest quarter in six-month period levels ever at just over 56 million pounds for the quarter and over 100 million pounds year-to-date.
Prior to Q2, our highest quarterly shipments had not exceeded 50 million pounds. The driving force for the increase this year is robust demand for all aluminum grades being used in the automotive industry, a trend that we believe will continue to grow.
In the Lead Fabricating segment, volumes were up 6% from the first quarter to 9.3 million pounds but was somewhat offset by higher average selling price of $1.74 per pound as the company continues gravitating to more value added products.
In the second quarter, we saw 4.7 million increase in consolidated operating income, generating a $2.7 million profit after a loss of $2 million in the same quarter in 2013. Metalico scrap metal recycling segment generated profits of $3.5 million before a $1.3 million reduction for corporate overhead expenses.
The Lead Fabricating segment continue to report consistently good profits with $822 million -- I'm sorry, we wish it was $822 million -- $822,000 in operating income before corporate overhead of $165,000. Companywide, we remain focused as always on improving metal margins, developing operating and transportation efficiencies and controlling overhead.
We have reduced operating cost and our quarterly SG&A expense is lower again. We are encouraged with the improvements in our operations and we’ll continue searching for opportunities to further improve our cost structure and enhance margins.
In our release issued earlier this morning, we detailed year-over-year second quarter financial statement volume comparisons reflecting lower performance for the reasons discussed. I won’t repeat these details again but instead provide some highlights and refer you both to the release and our Form 10-Q for the quarter we expect to file shortly.
And just a correction from above where I said reflect lower performance, obviously the word should have been higher performance, my apologies for that.
Let’s go over some of these highlights on the comparisons of the second quarter and the first quarter. Sales rose 5% to $142 million from $135 million. Operating income improved by $4.7 million to $2.7 million profit compared to $2 million operating loss.
Net income improved by $4.2 million to $300,000 profit as compared to a net loss of $3.9 million in the first quarter. Net income per share increased to $0.01, compared to a loss of $0.08 per share. EBITDA more than doubled to $7 million from $2.8 million.
Unit volumes shipped jumped by 30% for non-ferrous scrap and rose 1% for ferrous scrap. Lead product shipments fell by 6% to 9.3 million pounds from 9.9 million pounds.
Let’s go over some balance sheet and look at some highlights there. Outstanding debt fell slightly to $126 million at June 30th from $127.4 million at year-end 2013. The balance in our revolving credit facility at June 30th was $51.2 million compared to $45.9 million today. Our revolving credit availability combined with cash as of today is $13.8 million.
Noncompliance with principal payment obligations under outstanding Convertible Notes, together with a violation of the leverage ratio under our senior secured financing agreement have required us to reclassify most of our long-term debt to short-term…
However, Metalico continues to generate ample positive cash flow to service all our current principle and interest payments and to meet our daily obligation to scrap suppliers as the materials was received at the yards.
Under the terms of our Convertible Notes, holders were entitled to deliver notices of redemption on or before June 30th requiring the company to redeem the Notes at par. On June 30th, the company announced an agreement in principle to restructure the principal balance of the Notes that would defer the Note holders` put right till December 31 of next year, using funds made available by senior lenders pursuant to an amendment under senior financing -- under senior secured financing agreement and other consideration.
However, proposed terms of the amendment to the financing agreement as it was drafted conflicted with the terms we had agreed upon with the Note holders and an amendment to the financing agreement has not been completed.
We continue to negotiate with the Note holders and the senior lenders to reach an agreement. Such an agreement may include an extension of the put right, the issuance of new debt or equity or a combination of both, starting with the framework of the general agreements in principle reached among the parties on June 30th.
Last Friday, we announced that our senior secured lenders have invoked their right to block payments to the Note holders after the failure to redeem the Notes on June 30th caused defaults under the governing documents.
We have retained Imperial Capital, LLC to advise us in our negotiations to amend the debt facilities and to assist and proposed asset sales, also previously announced, which intended to generate proceeds to delever the company.
Before I start our business outlook, let me once again remind listeners of our policy and guidance and forward-looking statements. Metalico’s long standing policy is not to provide guidance and earnings estimates. Nothing we say today should be interpreted as earnings guidance.
Scrap recycling industry is cyclical and commodity metal prices can be volatile and fluctuate widely. We’ve consistently stated that earnings estimates could prove to be unreliable because of the unpredictability and potential magnitude of commodity price swing and their related effects on scrap volume purchases and shipments.
Now for an outlook and commentary on our industry, looking product by product category, let start with the ferrous market, an uptick in steel industry capacity utilization since the first quarter from 73% to 75% utilization has helped to improve scrap demand and stabilized scrap selling prices, especially for cut grades.
Shred prices still show weakness relative to other grades. The export market while still soft is beginning to show signs of improvement. Scrap availability is benefiting from a strong seasonal upswing in demolition activity, factory cleanout project and improvement in the manufacturing segment.
Non-Ferrous including aluminum de-ox category, increased aluminum and stainless steel demand has been the key driving force of rising prices of late. Copper demand and pricing are stable and remain mostly unchanged.
We expect continued strength in demand and price for most aluminum products, including de-ox, through year-end and at best a sideways market for nickel and copper-based scrap metals.
THE prices of platinum group and minor metals have been trending slightly higher during the second and early into the third quarter. Based on rising demand for PGM's from auto manufacturers and a stabilizing minor metals market, the second half of 2014 could show improvement in metal demand and possibly support-related commodity prices.
On the Lead Fabricating front, we expect continued steady to slightly improving demand in our markets and our product sold. Improvement and availability of shot reload components, specifically black powder, is expected to improve demand for bagged shot over the remainder of the 2014 shooting season.
Lastly we’re optimistic that the recent positive industry developments will take hold and provide the loan overdue financial improvement for our industry and for the company alike. In the mean time, we at Metalico, we will remain focus on reducing debt and securing a capital structure that will endure in good times as well as bad times.
Metalico is lucky to have dedicated, capable and loyal workforce and management team that has often been faced with difficult circumstances and has always been up for that challenge.
Today financial results approve of what we can accomplish. I believe that again we would like to meet our challenge and for that we’re truly appreciative of our employees, our suppliers and shareholder who are there, unwavering support.
Operator, this concludes our prepared remarks. So if we can open up the calls for questions, that would be great.
Thank you. (Operator Instructions) And we have our first question from [Ankur Sega] (ph), who is a Private Investor.
Hi, good morning. Thank you for taking my questions. Good to see some relief and some positive results. So congratulations to all the efforts by your teams. I wanted to ask you about in the last release, you mentioned that to reduce the debt, you’ll be selling some non-core assets. Can you shed some light on as to basically how much you can actually get from those non-core assets. So what will the debt look like, let’s say, by the year end? How much you can reduce it and what is the progress being made on that?
First of all, it is difficult to predict and to speculate on a phone call what we will get for specific assets and that would be essentially -- that practice to negotiate ourselves -- against ourselves. Obviously, we’ve set certain internal targets that would reduce the debt, enough to relieve our leverage to deal with secured lenders and note holders.
The process is ongoing we have been in touch with several interested parties and different assets that we have identified as those could be available for divestiture. We expect to continue making our progress on those funds and would be able to report to the shareholders as results become available and rather than comment on possibilities on our policy or practices, is to comment on the facts and not to try to speculate what might be not a result.
But certainly our goal is to reduce debt significantly to be able to have more manageable capital structure to operate in a cyclical industry. Hopefully that gives you some insight into what we’re doing.
I understand but can you provide some time line as to when the result would come out with a positive, negative or whether you would find out as to you’d be able to tell -- make a press release or tell the shareholder as to when that will happen in the next quarter, in the next six months?
Our goal is to be complete or substantially complete by year end that may happen or may drag into next year. But certainly the quickest we can get it done, it’s in our best interest to do it rapidly and not to delay or deliberate on it. But we’re hopeful that by the end of this year, we will have some thing to report to the shareholder that is more definitive.
Okay. All right. Thank you guys. Good luck and hopefully we’ll see more positive result in the near future.
Thank you very much. Appreciate it.
Thank you. Our next question is from Alyssa Johnson with D.A. Davidson.
Alyssa Johnson - D.A. Davidson
Good morning. This is Alyssa in for Brent today.
Alyssa Johnson - D.A. Davidson
So I may have missed it. What did you say the average selling price was for later in the quarter?
Our last revenue $4, I believe I said. Let me go back and check it. $1.74 per pound of the average sale of product some higher and some lower of course.
Alyssa Johnson - D.A. Davidson
Okay. And also in your press released mentioned some commodity selling price volatility and I was wondering if you can kind of touch on that, how it change over the quarter as you are seeing at data a little bit towards the end or do you expect this to kind of continue this trend forward?
I think the comment is that while we’re in a cyclical volatile industry, we have seen less volatility recent particularly the ferrous pricing has been more stable and stable is good. It’s a -- it’s more -- it's easier to run the business in the stable price environment than the volatile price environment.
While we are happy that prices aren’t higher. We are happy that they aren’t fluctuating as widely. I think for the period we saw only about $14 per ton fluctuation, compared to the prior period, which is pretty good concerning what we have seen in the past.
On the non-ferrous pricing, couple of areas, the aluminum prices in general have been rising, stainless steel prices and related high temperature nickels metals, nickel based, nickel metals have been rising, copper has been relatively flat.
But ultimately the price that we report depends on the mix of the volume of metals that we ship of each kind a as that make changes, the average selling price changes for us. So it’s not just impacted by the commodity price. It’s impacted by the mix of what we sell.
Alyssa Johnson - D.A. Davidson
Okay. Perfect. And then just one last one, the non-ferrous volumes were pretty large over the quarter and I was just wondering if you could maybe touch on that a little bit too and also if it changed through the quarter, I feel it largely one specific time?
We are happy to touch on, as a matter of fact, it was a record high for the company and very significant number, we are very pleased with that. I just -- I think we did comment a little bit. It’s a largely driven by increased the volumes in our aluminum business, both de-ox and other aluminum products that we produce without getting into further specific.
We feel that a trend that we continue to see and expect that given the strength in the automotive industry, there is a lot of demand out there and unfortunately we are able to meet that demand. So we are expecting and anticipate expecting to see that continuing into the next few quarters and hopefully into next year. So it’s largely driven by aluminum would be the answer.
Alyssa Johnson - D.A. Davidson
Okay. Perfect. Thank you.
And thank you. (Operator Instruction) And I see no further questions at this time. I will now turn the call back over to Mr. Agüero for final remarks.
Okay. I guess we did a good job just taking questions and answering them. So I want to thank you Operator. We will now move one and I want to thank everyone for joining us and for their interest in Metalico research and development. And we look forward to speaking with everyone in early November when we present our 2014 third quarter results or quicker than that if we have significant developments to report on all these trends that we discussed on our call today. With that, I wish everybody a great day. Thanks for the participation.
And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.