Real Industry's (RELY) CEO Craig Bouchard on Q2 2016 Results - Earnings Call Transcript

| About: Real Industry, (RELY)

Real Industry, Inc. (NASDAQ:RELY)

Q2 2016 Earnings Conference Call

August 10, 2016 01:00 PM ET

Executives

Kyle Ross - CFO

Craig Bouchard - Chairman and CEO

Terry Hogan - President of Real Alloy

Analysts

Daniel Moore - CJS Securities

Josh Nichols - B. Riley Financial

Steve Dyer - Craig-Hallum

Anup Goswami - Odeon Capital

Owen Douglas - Robert Baird

Operator

Greetings and welcome to the Real Industry, Inc. Fiscal 2016 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Kyle Ross. Thank you. Mr. Ross, you may begin.

Kyle Ross

Thank you, operator, and good morning all. Welcome to Real Industry's second quarter 2016 earnings conference call. I'm joined today by Craig Bouchard, our Chairman and Chief Executive Officer, and Terry Hogan, President of Real Alloy. After comments by Craig, Terry, and myself, we will take your questions.

For anyone who is not able to listen to today's entire call, an archived version will be available shortly. Please visit the Investor Relations section of our corporate website to access the replay. Before beginning our discussion, we want to make you aware that our prepared remarks and responses to questions may include forward-looking statements that involve risks and uncertainties and, that actual results could differ materially from such statements made by us.

Information concerning factors that could cause actual results to differ from those in the forward-looking statements may be found in the Company’s SEC filings under the risk factors section. In addition, our comments today refer to non-GAAP financial measures such as adjusted EBITDA. Reconciliations to the most directly comparable GAAP financial measures are provided in our earnings release and Quarterly Report filed with the SEC and posted on our website.

We believe these non-GAAP measures provide useful information for evaluating our business performance. This information should be considered as supplemental in nature and should not be considered in isolation or a substitute for the related financial information prepared in accordance with GAAP. Please be advised that the contents of this conference call contains time sensitive information that is accurate only as of the day of this live broadcast on August 10. Real Industry undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call except as required by law.

Now that we've covered these cautionary statements, today we thought we would change up our format a bit keep everyone on their toes. I will start with a financial report, Terry will give color and Real Alloy’s market environment and then Craig will close some thoughts on outlook. The last couple of quarters we’ve targeted an hour and admitted we’ve run over that time, so we’re going to shoot for 45 minutes this time and see how we do. Let's begin. The second quarter of 2016 is our first comparable period since the acquisition of Real Alloy last February but please remember our year-to-date results are still not comparable. On a consolidated basis, Real Industry reported sales of $320.9 million and operating profit of $8.1 million and a net loss attributable to the company of $1.5 million. Loss per share available to common shareholders was $0.07 and this is all for the three-month period ended June 30, 2016.

Our revenue is derived almost entirely from our Real Alloy subsidiary which generated segment adjusted EBITDA $20.9 million during the quarter on 294,000 invoice tonnes. Compared to the preceding quarter, second quarter volumes were up marginally on a global basis which was in line with management's expectations as Q2 is generally a stronger quarter than Q1 due to seasonality. Year-over-year volumes were lower by 3% largely due to reduced tolling business with certain customers who took advantage of low prime aluminum prices at the beginning of the year and who aren’t using as much secondary metal this, Terry will discuss that more shortly. Revenues were higher sequentially by approximately $11 million but decreased year over year by approximately $48 million due to the lower volume and lower metal price environment. Real Alloy is a mix of tolling versus buy-sell was 51% and 49% of total volume which was a change of in mix of approximately 2 percentage points from the prior quarter and year over year.

Adjusted EBITDA per tonne at $71 was 11% improvement over the first quarter but a 5% reduction year over year. Scrap spreads were tighter during the quarter as a result of the reduced scrap flow Terry talked about on last quarter’s call but an improved mix and productivity enhancements resulted in the sequential improvement in per tonne performance. CapEx in the second quarter was $5.8 million and year-to-date Real Alloy has spent $11.1 million which is well within the annual target we've previously given. As of June 30, 2016, on a consolidated basis, Real Industry had $40 million in cash and $319 million in total debt. The company maintained nearly $116 million in liquidity, approximately $98 million of which was related to Real Alloy from a combination of their cash on hand available borrowings under its North American AVL and the German factoring line.

Turning to our segments, Real Alloy North America or RANA reported revenue of $212 million and adjusted EBITDA of $14.3 million on 199,000 tonnes invoiced. Volume, revenues, adjusted EBITDA and adjusted EBITDA per tonne were all higher than the preceding quarter. Higher EBITDA per tonne was the result of a higher percentage of buy-sell business and lower cash conversion in SG& cost offset by lower scrap spreads. Year-over-year all metrics were lower largely driven by the reduced tolling business and tighter scrap spreads. This segment’s end use exposure to automotive applications remained consistent with the prior year at 59% of the invoiced sales volume. Real Alloy Europe or RAEU reported revenues of $108 million and adjusted EBITDA of $6.6 million on nearly 95,000 tonnes invoiced. While revenue and volume were slightly below first quarter, adjusted EBITDA and adjusted EBITDA per tonne were much stronger.

Scrap spreads were relatively constant during the quarter but improved metal recoveries and blending generated positive results. Year-over-year revenue dropped more significantly due to lower metal price environment and a higher mix of tolling business in 2016. Volume and adjusted EBITDA were marginal lower, while adjusted EBITDA per tonne was flat. This segments’ end used exposure to automotive applications also remain consistent with prior periods at more than 70% of invoiced sales volume. RAEU’s fair value assets step up resulted in 300,000 of non-cash amortization expense during the quarter, the amortization purchase accounting, amortization expenses now complete. Outside of our segments, operating costs of corporate and other were slightly higher sequentially but lower year-over-year, $500,000 of the $3.6 million in expenses during the quarter were non-cash share-based compensation.

In addition to filing our 10-Q yesterday, we also filed the standalone audited financial results for Real Alloy Holding Inc. for 2015 and prior years for the GRSA business as it was formally known. The presentation of results is the typical predecessor and successor format for an entity acquired mid-year, this one has a bit more complexity due to the fact that Real Alloy entity was formed in October 2014, five months prior to the acquisition, so we do have some overlapping periods for both the successor and predecessor have activity. Ultimately the purpose of this report is to give you a full-year look at Real Alloy with audited figures since Real Industry’s 2015 10-K only had ten months of activity. On the investor relations front, we’re scheduled to attend two conferences in the fall, Credit Suisse and Deutsche Bank, both in September.

This completes the second quarter financial report, Jerry would you mind adding some color.

Terry Hogan

Yes, thanks Kyle. Just to kind of reiterate second quarter from a Real Alloy standpoint continue to string of very solid quarter from a safety, productivity and adjusted EBITDA standpoint. Digging into a little more granular look at some of the things that Kyle touched on, on the volume side of things, the second quarter, excuse me, Kyle went through the numbers for the second quarter but digging into on a regional basis, the North American volumes were up in first quarter but down to second quarter of last year as we discussed last quarter the differences largely were driven by fall off in toll volumes for the quarter compared to both second quarter of last year and also to first quarter of this year. Buy-sell volumes increased which more than offset the drop from first quarter but did not make up for all the drop from second quarter which was a very strong quarter for us last year.

In Europe the volumes were down when compared to both prior periods but there is a bit there - it’s the opposite situation from what we've seen in North America where the fall off is driven by lower buy-sell volumes compared to both prior periods while toll volumes in the second quarter were higher than they were in both prior periods first quarter and also second quarter of last year. What is common is the low primary aluminum prices in relation to scrap prices in the fourth quarter and in the first quarter of this year have led to more use of prime in two specific areas, most notably in North America [indiscernible] where producers looked in lower cost primary metal for 2016 and reduced their tolling volumes of scrap as they had historically done. And also for high period of casting alloys which is most notable in Europe where primary producers took advantage of the opportunity to get higher prices for their lower and higher purity materials because those metals were selling for higher prices than primary was at the time and so therefore they took advantage to get those prices instead of producing metal to delivering into the LME.

Financially as Kyle touched on, another solid quarter and even more importantly liquidity grew $20 million for the quarter to end at $98 million. As we look on around the marketplace, the automotive industry both in North American and Europe has certainly had very strong performance in the first half of the year and is forecasted by most analysts out there to finish 2016 very strong. Although there has been some recent adjustments to forecast especially in North America, the forecast that I've seen continue to call for volumes well over 17 million units in North America which is a very strong year historically. We're just coming out of the summer shutdowns in North America and we are already in the middle of summer shutdowns for the automotive producers in Europe. What we've seen so far is that the outages in North America have lasted a few days longer than they have in each of the past few years but to-date the ramp ups following those shutdowns have been pretty normal as they ramped back up as production volumes. So that continues to play out as we look forward.

In the building and construction segment, we talked last quarter about having a very good start there and that certainly continue to the second quarter. BNC market has certainly been a positive area so far and it looks like it is continuing into the third. Similar story in the aerospace side with a good first half under her belt. The beverage can market has remained quite steady overall as it has for quite a number of years now but as I mentioned the lower LME prices have negatively impacted the tolling volume especially in North America. The level of activity in the steel industry has picked up from the first quarter but still remains behind historical levels and continues to have a negative impact as far as the pull for fairer scrap goes so that’s still a factor that’s out there.

From an LME and pricing standpoint, the LME continues to trade in a range similar to first quarter with LME cash prices ranging from about $1,480 a tonne to $1,670 a tonne throughout the second quarter, although it is pretty much stayed above 1,600 since middle of June right up to yesterday when it closed at 1,625, little higher prices more recently. The mid-west premium on the other hand has continued to drop, currently sits at $0.625 [ph] a pound down from $0.775 [ph] at the end of the first quarter so that's moved down into I would say the historical range may be in the mid-low end of that historical range from where it was up to $0.24 year and a half ago. On the cast to foundry the alloy side in Europe we've seen average metal bullets [indiscernible] which is European equivalent of 380 price in the second quarter stated quite flat with prices at EUR1,620 a ton in March and sitting at sitting at EUR1,625 a ton in June, so not much movement there.

In North America we’ve seen much more price pressure on the [indiscernible] prices where they drop from $0.87 a pound in March 31 to $0.83 a pound on June 30, so a $0.04 drop over the quarter. Most of that or some of that at least has been driven by higher level of imports as a result of the strong dollar which has made the US secondary market a more attractive option for secondary producers in southern Europe and Russia. In Europe, the scrap prices during the quarter remained quite consistent while we did see some scrap prices in North America that continue to put pressure on margins. We can see - you can see that impact as we look at our EBITDA per tonne that Kyle mentioned that increases in both regions compared to Q1, we stayed flat to Q2 in Europe but that compression that I mentioned in North America shows up in the North American numbers and second quarter when compared to second quarter last year.

Much of the increases from the first quarter in both regions as a result of the productivity initiatives and focus on scrap preparation and melting practices which will continue to be a key area of focus for us on a going forward basis. Since the end of the quarter I guess there is a little bit of brightness from a pricing standpoint, published prices have moved up somewhat, the August metal bullet on average price for [indiscernible] is up to EUR1,645, so up about EUR20 a tonne since the end of the quarter and the current plats price as of this morning was [indiscernible]. So a little bit of movement up while scrap prices have remained relatively consistent. So as we talk about the - as we talked about last quarter excuse me, we finished the transition service agreement with Aleris and completed the separation from their systems during the second quarter and the financial impact of that and lower cost is reflected in lower SG&A any costs that’s showing in Q2 compared to Q1. So, all in all a very solid second-quarter, it certainly been and it's likely to continue to be a challenging marketplace but we continue to look for the opportunities that are out there and we will realign our buy/sell and toll volumes accordingly to take best advantage of the opportunities that we have.

With that I will give it to you Craig.

Craig Bouchard

Thank you Terry, welcome everybody to the call, all of our analysts, people that are interested, shareholders and bondholders great to have you at the large list of participants this quarter like always. Terry talked about quarter, we had a very nice quarter I think and pretty much what I expected. I'll talk a little bit more about the outlook. I usually start off with the good news and then add some bad news in it for balance and as everybody knows my style is somewhat direct and hopefully transparent. Today - if you can have fun on a conference call, let's have a little bit today, I will start with the bad news and reverse the direction and keep everybody guessing a little bit. And perhaps beginning with the macro and working our way down. So obviously the US and European economies aren’t growing, virtually all of these countries are suffering from lack of demand and there is economic and political uncertainty out there everywhere simply said these three facts are really finally correlated.

Adding to the uncertainty is the EU Brexit situation and what next, the immigration fiasco driven by tensions in the Middle East, poor economic health in the once fast-growing BRICS countries, a lack of leadership by the US on the global stage combined with our wild November election process, it all adds up to a lot of uncertainty. And put simply as an industrial company operating in six countries in North America and in Europe, it is a tough time to do well right now. And our team is doing pretty darn good and Terry, you and your entire team and your 1,700 employees can be congratulated coming through this somewhat turbulent time pretty darn well. But that's a lot of issues out there, so what’s the good news. Well, in the four aluminum consuming sectors; auto, aerospace, construction, and food and beverage can, the macro looks a little bit better on average than it does across the variety of all sectors in North America and the European markets. The auto sector of course is doing quite well, aerospace not bad, construction not bad, food and beverage food, but at least consistent.

But on top of that sort of slightly better performance for our sectors, energy project [indiscernible] skilled labor is available, interest rates are low, productivity increases especially in our company are significant and as we are seeing on the case of Real Alloy bolt on acquisitions are starting to pop up for us to look out that are quite interesting. So that's not bad and while demand for most commodities globally are lagging aluminum consumption is growing at about 5% that’s globally while aluminum production is growing at a 2.5% rate that's pretty good news indeed as we will cross the curve in 2017. Analyze those numbers and it seems clear that we will go from an aluminum production surplus in the world to a deficit next year. I think that's pretty good news for people in our industry.

Next up our two largest customer sets are reasonably healthy, except [indiscernible] automakers sort of the biggest of our customer base aluminum rolling mills the second big chunk of our customer base. Remember we sell into the auto business directly and we also reach auto and the other three aluminum consuming sectors aerospace, construction, and food and beverage through the aluminum mill customers. Let me just mention a little bit about those. The auto sector is doing okay, we think it is going to continue but there is a directional debate out that. You might have noticed Ford came out with a statement the other day indicating auto isn’t growing, this led to the panicky crowd to start calling for 17 million or 16 million units when [indiscernible] really was that at this very historical high level they don't expect it to grow. So to be clear, we don’t expect the auto sector to grow much from these lumpy levels, however along nearly all the analysts to know what they're talking about I think I don't expect any major fall off soon if true this means good things for us because aluminum replacement came to the auto sector is growing at 15 to 17% range that we anticipated, it’s pretty good thing.

A couple of trends to watch, first, there is a hectic slate of new models speced and being brought to market by each of the major automakers over the next 3 to 5 years, the schedule is actually remarkable. It is a good sign. Secondly the buying behavior of the millennials and yes, even some of us just say of the older generation, our behavior is changing, we want 24/7 connected and we want it in our cars and this is spurring an predicted replacement of older vehicles so all bodes pretty well for a business and [indiscernible] and for those in the automotive business generally. While these trends are unfolding, the aluminum megatrend in auto is picking up steam and running at or ahead of what we expected one and a half years ago. It seems like a decade ago when we debating whether the launch of the all-aluminum Ford F150 would be successful or disaster it was only 18 months ago. And a lot has happened since then. Now nearly every automaker is engaged in a spirit to lightweight their vehicles so they can meet the ever tightening CAFÉ and CO2 emission standard.

Nearly every month we read about a new auto platform loading up on aluminum, the other way Ford announced that the super duty, the massive in US market share leader in heavy truck began rolling of the line and bought a new plant in Kentucky, yes with aluminum sheet, that’s a big one, that is just one of many that's been announced even announcements are now becoming almost. Over the aluminum mills, really good customers and historical customers of our company, these are companies like our [indiscernible] these companies excellent customers of ours, but the aluminum rolling mills themselves are in a transition, they basically have revamped their strategy in recent years and they are now constructing their new facilities to serve auto. Some of these projects are on target in terms of timeline, a bunch of them are delayed but they are all coming up and they all have auto customers waiting for them and you can bet your bottom bell or even though many aren’t probably yet announced.

But these are not healthy companies in our relationship are long-lasting and significant. To the aluminum market itself, scrap prices fell as Terry was mentioning to levels that affected scrap supply and even the survival of scrappers and scrap prices started falling fairly recently and confirmed. While that happening LME, Platts, Metal Bulletin, and index prices trended slightly down and Terry mentioned the Midwest which dipped. So there was a bit of a squeeze in scrap spreads and so we monitored that, we monitored daily, we have more data about this than probably any company in the world since we are a big component of the index that it's created doing so many transactions.

But in this transition out there we've had a pretty good year, being on plan and improving ourselves to our lean and continuous improvement programs. We finished Aleris transition services agreement on budget that was a great thing and invested significantly in our people to this date. I think we've done a really good job on both these fronts. As to the short and medium term outlook, Q3 is just in my gut feel a little bit weaker because there were some extra days, a lot of shutdown pretty much across most of the companies we do see last year and the scrap spreads during this transition were a little bit tighter. So I think Q3 being not quite as strong as Q2 with Q4 again looking stronger than Q3. I like to be direct with people and that's what my gut feel is of course prices are changing every day, so people can prove me wrong one direction or another but that's my gut feel about it.

There is one final trend developing so I'll mention it with the steel industry leading the way, we are finally on the verge of accomplishing meaningful production, again subsidize imports of metals. The aluminum industry hasn’t yet flexed enough muscle, I'd like to encourage our leaders to do so but the trend is certainly positive and looks to be a significant development for our industry and by the way very significant for the steel industry. So we're riding on the coattails a little bit. Our industry leaders need to turn up the heat and our politicians need to pay attention to American jobs, it is time. Final comment, our bond prices are very pleasant thing to read, we are one of the best performing industrial rated bonds in the United States. Our bondholders who have transitioned a little bit over time are people that have done their analysis, have found us to be one of the very best credits out there and I’m very proud of that being one of the best performers in the US secure rated bond market is a great talking point for our company and one that we aspire to continue to be. And so, that's my basic summary for today and I want to thank all of our bondholders, shareholders and all the others that support our company, I think our future looks pretty good and we will open up to some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Daniel Moore of CJS Securities. Please proceed with your question.

Daniel Moore

Wanted to focus on a couple of things. First, you mentioned some of your tolling customers are electing to use more prime, just wanted to see is that trend picking up as we kind of exited Q2 and entered Q3, is it leveling off, just trying to get a sense for the direction of volumes as we move forward and to the back half of the year?

Craig Bouchard

Yes. Terry will pick that one.

Terry Hogan

Yes, sure. It hasn't continued. I would say, it hasn’t continued to grow. Most of that activity was business that was booked late in last year, in the fourth quarter and in the first part of this year when prime was lower than it was today, and so they took positions as it would carry them. From what we know, it appears to be most of this year, probably. So we would expect that to continue into the third and fourth quarter, but I don't think it's a longer term phenomenon than that, based on what we know.

Daniel Moore

That's helpful. And Craig, you mentioned Q3 perhaps a touch lighter than Q2, you normally speak in adjusted EBITDA terms, just wanted to confirm that that's what you are referring to?

Craig Bouchard

Yes. Unfortunately everybody makes me live in that world, Dan. So that's where we are, adjusted EBITDA, that lovely term.

Daniel Moore

Indeed, understood. Switching gears, you’ve talked many times about China’s outsize impact on commodity prices in your markets, any update on the direction of China’s smelting capacity over the next 6, 12 months as you crystal ball that?

Craig Bouchard

I’ll start and Terry add anything that you’d like. Having lived and done business in China, I can say that any of us, I think we know where the Chinese are going wrong. There is a debate going on inside China though, and I think at the policy level would be a fair way to say on whether or not they shut down a few of the terribly polluting older facilities they have, which have been put on the list for shut down. The Chinese tend to want to maintain their jobs, surprise, surprise there. And so it's unclear as to whether each of the ones that have been on their shortlist will go off this year or not or are for a couple that have been off to even be restarted. So my anticipation is sort of in the middle of the larger number that they’ve talked about and the much smaller number that some analysts talk about. But I think the Chinese will in the end take off about 5% of their capacity.

Daniel Moore

That's helpful. The summer shutdowns, you mentioned a few days longer, is that both North America, Europe, or both?

Terry Hogan

Yes. In North America, that’s certainly the case. European shutdowns are actually underway and are starting and underway as we speak. Expectation is that they will be out a little bit longer, but not as much longer as the North American ones have been.

Daniel Moore

Got it. And lastly on the M&A front, any changes to your top five acquisition candidate shortlist? And as a follow-up, you talked about tuck-ins around Real Alloy. In the past, you’ve said it takes the same effort to do 0.5 billion acquisition as it does a 50 million, but at this stage, are you considering or looking at maybe a series of smaller acquisitions and do you have the bandwidth to go that route if you choose to?

Craig Bouchard

Yes. I'll take a shot at that. There is a couple of interesting points in there. So let me divide it out. We continue preparing to work very hard, those would typically be larger things. And at the Real Alloy level, there are some interesting bolt-on capabilities, and there we tend to utilize the Real Alloy team significantly in that analytical process. So we’re capable of juggling two balls at once. The bolt-ons are interesting. For me, for a larger season, a lot of people out there are thinking of a large recycling company as a turtle or a tortoise in the race with the hare, which would be the big ruling mills. And I don't think of our company that way.

I’m continuously thinking of our company as to how we make it leaner, more efficient and achieving growth potential. That growth can be organic and it can be through bolt-ons and we plan on doing both. We have a strategic initiative inside our company with our most senior executives and in fact some board members looking at how to materially over time, with some patience, materially increase the EBITDA of Real Alloy. Now, that's going very well and the thought process is fantastic and it's an in-depth thing that we do. So the two are quite possible to be working on two things at one’s needs. Generally, it takes just as much time to do a small one as a big one, but the bolt-ons aren't nearly typically as larger as what we would look at the parent. So we’re equipped to take those topics on.

Daniel Moore

Okay, thank you again.

Operator

Our next question comes from the line of Josh Nichols of B. Riley Financial. Please proceed with your question.

Josh Nichols

Hi, guys. Just looking here, so the rolling mills across the board are spending very sizeable amounts of capital to ramp up aluminum production capability in a big way, how long do you think until that starts to have a material positive impact on Real Alloy’s recycling business?

Craig Bouchard

It's a great question. Terry take your first shot.

Terry Hogan

Yes, sure. I think the mills are scheduled to come on, I mean, those schedules are pretty well published. They have started to come on obviously with Alcoa and Novelis already. The other facilities that are under construction are phasing on right now. And so I think as those - they start to produce product, it gets qualified as a rather lengthy process, but where you start to see scrap being generated and where it finds its way back into the stream is was what Craig alluded to earlier, as the new platform start actually using it in production and you’re going to start to see more scrap generated, more material in the marketplace and therefore more opportunities for us I think.

Josh Nichols

Great. And then last question, I’ll keep it short. So scrap spreads have been under some pressure, it's been a tough operating environment, but the company has done a great job with productivity enhancements, what do you think is the likely trigger that is going to cause scrap spreads to flatten out or possibly even expand whenever you're looking it over the next six or 12 months, potentially?

Terry Hogan

Yes, that's a tough one. If I knew that, I would probably be doing something different, but I think in general, there is nothing that you can sit here today and point to that I think you can pinpoint is going to cause the change to take place. I think there is a number of things that could impact it, certainly steel - if steel picks up along the lines that Craig alluded to earlier, you’re going to see more pull for ferrous scrap, it's going to put a move up in ferrous pricing presumably, which will then pull more material into the stream, which will result in more non-ferrous scrap and specifically aluminum scrap coming into the stream, which could result in some wider margins on scrap due to more availability and so forth. So I mean, there is a number of things that could influence it, but there is nothing that I could pinpoint to say here is what's going to happen and here is when and that will drive a change.

Josh Nichols

Well, thanks for taking my questions. I appreciate it.

Operator

Our next question comes from the line of Steve Dyer of Craig-Hallum. Please proceed with your question.

Steve Dyer

Thanks, good afternoon. I was wondering as it relates to acquisitions, if you could remind us Craig, kind of the different ponds or the different areas that you’re sort of comfortable fishing in and if there's been any change, I mean you’ve kind of always the stated goal has been one acquisition every calendar year and we’re entering the second half of 2016, and without divulging too much or whatever, just any update kind of on generalities of what you’re seeing and how we should sort of think about the acquisition strategy?

Craig Bouchard

Well, thanks, Steve. As a first part of the response, as you have reminded me on a number of occasions, but I hear it from some other wise people as well, under promise and over achieve is the way that we would aspire to run our company and communicate. So I’ve spent less time talking about the big acquisitions on this call than in prior calls, because I think it's - when we achieve, it will be obvious. That being said, we look across in essence the industrial sector, as we've said before many times, transportation, food, water, energy, as customer bases, but we look across the industrial sectors and we do tend to lean towards thematic things and this is with respect to the parent and when I say thematic, there is often a metals component involved in what we look at because we have strong expertise there. There is obviously an interest in us at this point with our next acquisition to focus on several important financial characteristics of our target.

And what we are looking for is and we’ll continue to do for it - to do as we move forward, always looking to up here our EBITDA on operating margins as a criteria. So Real Alloy, its many, many strengths is it really in the commodity business where the EBITDA and operating margins are not high on a comparative basis with other types of say, service companies. So, and are looking for things with higher operating margins so that our average continues to rise in those measures. We are looking for things that will have the direct impact on our NOL usage as everybody knows this to be important to us.

We are not generally looking at turnaround situations. We like to buy companies with excellent management teams in place, where we can help out by layering our Six Sigma expertise from the parent on the subsidiaries. And we have tremendous Six Sigma experience at our parent company and expertise there. So across the industrial sectors with some thematic play, if I were to say one thematic play, it is light weighting, which is something very interesting to us. That involves more than aluminum, light waiting plays could involve aluminum, carbon fiber, plastics, magnesium, ultra high strength steel, et cetera. So that's one area that we are interested in, but we see many opportunities and combining all those things into a good price that we can finance well is how we think as a company, as a board, as a management team.

Steve Dyer

Great, that's very helpful. And just I guess in general, what have you observed anecdotally on valuations and some of the things that you're looking at, you are obviously very price conscious and that's great, are people becoming any more rational on what they are expecting for some of these assets?

Craig Bouchard

Yes, it's a mix. We've had a few things that we've been interested in, thought it was a good match for us, talked with - indirectly or directly with an owner. If they love what they got, their price is always higher than what ours would be, kind of the way life works, right. In other opportunities, we see good value that might be missing one or two of the things we think are critical and we believe that we’re in a position to be picky. And by the way, we are a little bit late in terms of doing one a year, but it’s not like we've been idle because we put in an enormous amount of work into Real Alloy, creating the systems from a carveout, carveout is a difficult thing to accomplish well, which we did and accomplished well and on time.

But we've invested in our people there, we have invested in the continuous improvement environment that will do good things for us for years. And it's one of the ways that we’ve risen through this horrible commodity environment, kind of going smoothly through it. So, look, sometimes you just have to take little steps first, and then the big one comes. And when the big one comes, it comes. And the last thing that we want to do is make a bad deal. The only thing that I think can interrupt our very, very bright future would be to do a bad deal. We’re not going to do any bad deal. So when that day comes, everybody is going to be happy I think and I’ll call you first and get your vote when that day comes. How is that?

Steve Dyer

Perfect. That's all I have. Thanks, guys.

Operator

Our next question comes from the line of Anup Goswami of Odeon Capital. Please proceed with your question.

Anup Goswami

Thank you. Some steel makers have been making some comments about how high strength steel or AHSS could grow in the auto market over the next couple of years, just wondering if you’re seeing that they are making any inroads, in other words, steel or other lightweight materials?

Craig Bouchard

I’ll take that one on. Having spent a little bit of time historically in the steel industry, ultra-high-strength steel is going to play a role in auto. Because in the last couple of years, last - almost the last 18 months, ultra-high-strength steel is - if created correctly, meaning it’s well above, meaning that it has the ability - usually ultra-high-strength is going on the inside of a car and not on the outside - not on the exterior surface, et cetera. But you've got a couple of companies, I would mention, middle and Swedish deal as examples that are pretty good early suppliers of ultra-high-strength steel into the automotive market, those are companies with excellent technical personnel, good management, et cetera. I know them both a little bit.

The issue of ultra-high-strength steel is a little bit like carbon fiber. While it’s growing at a good pace, it's a very small starting point. So I don't know the exact amount of ultra-high-strength steel that will go into auto this year, but it might be 10 million tonnes or something like that. So it’s a small contributor. Will it grow? Yes. Is it the only hope of the steel companies holding off the aluminum companies from taking over that market share? Yes, it's pretty much the only hoe, but it's a small number, and it's not going to dent the growth of aluminum into auto, which is racing forward.

So in the end, there is ultra-high-strength steel in auto, absolutely, for sure, and advanced high-strength steel as well and there is the aluminum light weighting component and maybe some magnesium where some of the Europeans are interested in that as well. And carbon fiber will have a small place, but look the volume in the auto business is gigantic, the aluminum content is a big one growing at that 15% to 17% rate. So that's the real story continues to be the most important story.

Anup Goswami

Okay, great. And just one more question, just wanted to understand the company's capacity utilization, what's the total tonnage of capacity and how does the company think about that, is it based on five days or the seven-day week?

Craig Bouchard

I will let Terry take a shot at that one.

Terry Hogan

Yes. We don't publish our total capacity numbers. I would say in general, we run 24 hours a day, seven days a week at most of our facilities. And we've got, as you know, we've got 24 facilities and we've got a number of different pieces of equipment within each of our facilities. So as we flex, we’ve got all of our facilities operating and we’ll flex based on volume by turning another furnace on or reducing a furnace or turning one off for periods of time to flex with that volume.

Craig Bouchard

Time for two more questions.

Operator

Our next question comes from the line of Owen Douglas of Robert Baird. Please proceed with your question.

Owen Douglas

Hi, good afternoon, guys. I had a quick one. Just wanted to follow up on an earlier question with regards to the business that sort of shifted in North America from tolling to the prime, so you're saying that a lot of these agreements were signed into the end of last year, beginning of this year, and you expect that to last for the remainder of the year, is that correct?

Terry Hogan

Yes.

Owen Douglas

Okay. So when will be your next up opportunity to regain that business and how should we think about the market conditions that will be necessary for you guys to step back in as the supplier?

Terry Hogan

I mean, what we've seen already is we've seen prime, at least as we sit today, it moves up from where it was a year ago or nine months ago. The normal timing on process for securing next year's businesses is in the fourth quarter. So I would say that that will take place mostly in October, November, a little bit will drag over in to December, but typically it's going to be done in the first couple of months of the fourth quarter.

Owen Douglas

Okay, that's pretty helpful. As far as the conditions that you think you need in order to regain that share?

Terry Hogan

It's an unusual situation and not one that we’ve seen maybe ever from a relationship between prime and scrap prices and secondary prices. It was a period of time, maybe 15 years ago or sol where the primary aluminum companies were making 380 that was deliverable to the LME [indiscernible] contract, but that lasted for just a very short period of time. It really has to do with the relationship between the price of secondary metal and the price of prime aluminum. So as prime gets higher or closer to the price of secondary, then the incremental cost needed to take that prime and put it into an alloy form makes it prohibitive. So that's really the relationship that you have to look at.

Owen Douglas

Okay. And the European market, the conditions there, is that also going to remain for the remainder of the year, where we get that shift to the buy-sell business from tolling?

Terry Hogan

Yes, actually in Europe, it's the other way around. We've had lower buy-sell volumes because of tight margins and we've picked up additional toll volume because the opportunities presented itself and the margins are wider on the tolling. Our margins are wider on the tolling business. Well, as far as the incremental volume goes, we've shifted from buy-sell from - or we’ve shifted some buy-sell volume to toll volume in Europe, which puts us in a better situation than if we had stayed with the buy-sell volume.

Owen Douglas

And that should hold through the remainder of 2016?

Terry Hogan

Yes, I mean, if the margins widened on the buy-sell side, then we’d look for more opportunities to put more buy-sell volume back in our mix.

Owen Douglas

But those toll volumes are likely to stick with you guys?

Terry Hogan

Yes, I mean, they look pretty solid. And then again, we've got some furnaces that we could either ramp up or flip over to doing some buy-sell and move some material around to try to accommodate what the market offers.

Owen Douglas

That’s great. Well, thanks a lot guys.

Operator

Our next question comes from the line of [indiscernible] of Wells Fargo Advisors. Please proceed with your question.

Unidentified Analyst

Hi, where do we stand with the net loss carry forwards would be first question.

Kyle Ross

Ron, it’s Kyle. There is really no update in the kind of interim periods. So it really just rolls forward from year-end when you do your final tax works, the quarterly provisions are really just estimates and so the 870 number that we put out with the 10-K would be the number that still stands today.

Unidentified Analyst

So we are not digging deep into that at all with the current business model?

Kyle Ross

No, as you can see from the financials and as Craig has said previously about the Real Alloy business in particular, the one piece that doesn't match up with exactly what we’re looking for is the fact that sustain the 24 point if there is depreciation associated with that business. That's higher than we would expect in the sort of go forward business as we look at. So right now from a taxable income standpoint, the Real Alloy business is not putting a dent in the NOL.

Unidentified Analyst

Okay. And acquisition land, maybe this is for Craig. I’ve made some comments to my own name site, KKR and Carlyle and Blackstone and areas and they’ve all been adding to their assets under management, they have been adding new funds. Is that I mean the big boys, is that, there are saying with lots of cash at the moment, is that making it a bit more difficult or are we playing in a different field than they are?

Craig Bouchard

I will take a shot at that. It’s a mix between the big guys and their large amounts of funds at KKR for instance or Blackstone versus the NOL companies, some of which, some of those parties are invested in. I would say if there is a generic statement out there, the other NOL companies have not been successful drilling very fast. IESC is actually an NOL company that I like and they’ve grown in small bites, but very successfully, but there’s lots of NOL companies that have found it difficult to buy and the reasons are related to the IRS 382 rules on shareholder ownership changes, bit of, debt financing to be sort of recognized in the debt world for being able to raise debt.

There is a lot of reasons why a number of these things have not worked. I would say that our company is the one that has grown the fastest of all the NOL companies that are currently out there, except for the older ones that have been around for a decade or longer. So at the moment, we’re clearly the quickest growing. And as we go forward, it's nice to say that we have very strong access to capital, Ron. Some of the reasons I mentioned are bond price and we’ve performed in the debt market, we have very strong following there and really great bondholders, and as we’ve gone out and visited the debt houses, looking at our access to capital for acquisitions, we've had very strong positive responses. So we don't have any issue there. So generally, we kind of like where we are at. Our NOL is a very long-tailed, our NOL is agnostic, we can buy anything and use our NOLs as long as it’s American profit. We like where we sit and we're not in a rush.

Unidentified Analyst

Okay, thank you for your comments.

Operator

There are no further questions in the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Craig Bouchard

Well, I will sum up, thank you very much for attending. For those that were in the list and didn’t finish in the list, we’ll reach out to anybody else that has other questions for us as we always do. Thank you for attending, thank you for being a shareholder or a bond holder in Real Industry. We very much appreciate it. And we look forward to the next quarterly call.

Operator

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.

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