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Metalico, Inc. (NYSEMKT:MEA)

Q2 2012 Earnings Call

August 7, 2012 10:00 AM ET

Executives

Carlos Aguero – President and CEO

Michael Drury – EVP and COO of PGM, Minor Metal, and Lead Operations

Kevin Whalen – Senior VP, CFO

Analysts

Frank Gillman – DA Davidson & Company

Joe Jim Michael – Global Hunters Securities

Scott Huntington –Bodell Overcash Anderson& Co, Inc.

Chuck Clarke – Metalico Inc.

Operator

Good morning, my name is Monica and I will be your conference facilitator. At this time I would like to welcome everyone to the Metalico 2012 Second quarter results call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period, I would like to remind you 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 June 30th 2012.

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 sector online files or directly through the company’s website at www.metalico.com. Just log on the website, click on, ‘Investors’ at the top of the homepage and then click on, ‘SEC filings’ in the left column, then click ‘download the report.’ Metalico’s filings are also available at the SEC’s website at www.sec.com.

In addition, this audio replay of the call will also be available at 888-843-7419 or 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 32923816.

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 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, or forward looking statement, any discussion of the factors that could cause results to differ materially from the discussion today, please refer to the Risk Factor Discussion in Metalico’s Annual Report on form 10-K for 2011, which is also available online.

In addition, during the course of the conference call, certain non-GAAP financial measures may be described which should be considered in addition to and not in lieu of comparable GAAP financial measures. The company has provided reconciliations of these non-GAAP measures to what it believes are the most directly comparable GAAP measures in the earnings released.

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.

Carlos Aguero

Welcome and thank you for joining us today. With me here are Michael Drury, our Executive Vice President and Chief Operating Officer at PGM, minor metal and lead operations and Kevin Whalen, Senior Vice President and Chief Financial Officer.

Following my remarks we’ll 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, the company’s ferrous and non-ferrous recycling business generated operating income before profit overhead despite tough market conditions, although at reduced metal margins compared to our prior year. In fact, this quarter all segments operated profitably before operating overhead.

In the quarter ferrous and non-ferrous metals recycling contributed 95% of consolidated operating income on 68% of revenue. Demand on modern buyers of scrap has been on and off. Scrap supplies are tight and to our knowledge, no one in our industry is operating even close to capacity.

We shipped 140000 gross tons in the quarter versus 145000 gross tons a year ago, a decrease of 3.5%. After a soft July, demand and pricing for August has rebounded significantly. PGM recycling margins continue to be impacted by competition and volatile prices. Molybdenum selling prices remain under pressure throughout the quarter, but were partly offset by strong quarter in sales. The Lead fabricating business continues to improve profitability and demand has improved. Sequential pounds sold were up by 16%, 12.3 million pounds with an average selling price of a $1.54 per pound. However, quarter to quarter volume sold was down 7%.

As we commented previously, stronger consumption and production in the economy will help to generate more scrap and further industry consolidation would help rationalize conditions of supply in the scrap market. At Metalico, we are all focused on improving scrap margins and have employed discipline to achieve this objective.

Now let’s review some operating results. Our sequential operating performance declined from the first quarter of 2012. Net income for the second quarter benefited by 4.6 million for a one-time realized gain on settlement offset in pride by $1.7 million write-off and receivables owed by a customer that filed bankruptcy during the quarter.

Focusing on the highlights. Sales fell 9.7% to $148 million from 164. Operating income declined to $1.6 million from $5.9 million. Net income was $2.9 million versus $2.2 million. Earnings per share $0.06 compared to earnings per share of $0.05. EBITDA was down to $9.8 million from $10.3 Million. Unit volume shipped increased by 2.3% for ferrous scrap but fell 11.3% for non-ferrous scrap. PGM troy ounces recycled fell to 10,400 ounces from 20,800 ounces. Minor Metal shipments declined to 600,000 pounds from 631,000 pounds and lead segment operating income more than doubled to 1.1 million from 520,000.

Let’s go over a few balance sheet highlights. Liquidity remained strong with working capital rising by $2 million dollars from the start of the year to $117 million. Debt increased by 7 million to $136 million as of June 30th, 2012 from $129 million December 31 of 2011. The increase resulted principally from borrowing from the Company’s revolving credit facility to finance the $20 million increase in receivables and $15 million in capital expenditures. As part of our plan to reduce long term debt, the company has re-purchased $7.3 million of its convertible notes this year at a discount, lowering the outstanding balance to $68.8 million on June 30th.

Shareholders’ equity increased by $6 million to $198 million compared to $192 million as of last year end. Our shares have remained virtually unchanged. Shares outstanding remain virtually unchanged. Availability under the revolving credit facility as of the close of business yesterday was $42 million and our revolving outstanding balance was 31 million, so we continue to have more than ample liquidity to operate the business.

Now an update on business development. Investing in the business has never been more important in order to succeed in a fast moving, ever changing competitive environment. Current capital constraints and high valuations and expectations of sellers inhibit our ability to be active on the acquisition front. So we continue with efforts concentrated on internal growth. As a result, the last 18 months represented Metalico’s biggest period for capital expansion and improvement projects, totaling about $43 million.

During 2011, you recall we invested almost $28 million in the business, the largest of which was the new Buffalo shredder facility. So far in 2012 we have invested an additional $15 million in the business. We have significantly upgraded the shredder box in Youngstown, Ohio and now are in the planning stages for upgrading in the backend non ferrous recovery system there to be more productive.

In addition, important environmental and somewhat management projects on the property are well underway and should be completed during the third quarter. We utilized $3.6 million to complete the non-ferrous processing system for the new shredder in Buffalo which has demonstrated excellent recovery. We acquired and completed improvements on our property in Buda, Texas at a cost of $3.5 million, thereby reducing our occupancy costs and expanding the types of scraps we buy there. It’s actually creating a new full service platform scrap yard. Lastly, we completed the previously mentioned expansions in Northern New Jersey and in Pittsburgh.

As we have commented in the past, success in our industry largely depends on securing scrap at purchase price levels that will produce acceptable profit margins. Therefore, maintaining discipline in our buy pricing is of paramount important to us and we will remain vigilant in this area.

Looking ahead for the remainder of 2012, our primary strategic objectives are building on the successful ramp up of new operations in Hamburg, New York and Elizabeth, New Jersey, rebuilding and diversifying the scrap found in the Buda, Texas facility, continuing to strengthen our working capital and maintaining ample liquidity to pursue all viable scrap buying opportunities as they arise, turning over all of our inventories more quickly and controlling credit risk closely, continuing to manage employee health, safety and environmental risks, exploring opportunities to refinance or retire our outstanding convertible notes, continuing efforts to reduce operational costs. So far this year we have taken and annualized $1.5 million out of our operating budget. We plan to make further reductions in excess of $1 million in the weeks to come.

Lastly, Metalico is well known within the industry and we will build on our good reputation as a company that operates transparently and honestly with our suppliers and provides quality service to our consumers and respect and care for its employees. As we announced earlier today in the earnings release, we plan to explore strategic alternatives for the lead fabricating segment which represents about 12% of Metalico’s consolidated sales. We are determined to further strengthen and expand the scrap metal business and become more of a pure play recycler which will enhance our competitiveness. We work hard to ensure that we are investing finite resources only where we believe the returns are the greatest and efforts are aligned with our strategic objectives.

Before I start on our business outlook, I wanted to remind listeners of our policy on guidance and on forward looking statements. So bear with me in this. Metalico's practice, as is common in our industry, is not to provide guidance on earnings estimates. Nothing we say today should be interpreted as earnings guidance. The scrap recycling industry is highly cyclical and commodity metal prices regularly fluctuate widely. We have consistently stated that the earnings estimate could prove to be unreliable because of the unpredictability and potential magnitude of commodity pricings and the related effect on scrap volume shipments.

Now a few words on business outlook starting with ferrous. After bottoming in July, ferrous market pricing rebounded sharply into August. We expect steel industry capacity utilization and scrap selling prices will remain relatively stable in the near term, although some pockets of weakening mill demand may occur. The challenge will continue to be buying material at acceptable margins. Take advantage of the recovering scrap selling prices this quarter, our emphasis is now on turning existing inventories, sourcing new scrap and maximizing our shipments. We expect to meet or exceed ferrous shipments made this past quarter.

Non-ferrous, including aluminum deox, here we anticipate the non-ferrous unit shipments will remain at a range experienced over the last six months, which were up about 20% from last year and non-ferrous metal prices will continue in a narrow, but weak trading range. Demand and pricing for deox products have moderated after strong showing in the first quarter. Steel production is expected to rebound after the second quarter slowdown, with higher steel industry capacity utilization over the next few months.

PGM pricing or pricing for PGMs trended downward during the second quarter. We expect continued price volatility within a narrow trading range over the next few months. Current prices and competition should continue to limit unit volume. We also expect to meet or exceed shipments from this past quarter. On minor metals front, both pricing trends and demand for minor metal products were steady during the quarter. Generally favorable market conditions should continue into the second half of the year and we anticipate unit shipped should remain steady throughout the remainder of the year.

On the lead fabricating front, product shipments and profitability improved during the quarter as compared to the first quarter of 2012. Metalico’s focus will remain on expanding the number of value-added products available, improving productivity and passing through rising costs for the entire product selling prices.

I want to thank our management team and all of our employees for their contributions to past results and for their ongoing commitment to the company. For our shareholders, we are grateful for your investment and support of Metalico, particularly in these very trying times.

With that, this concludes our prepared remarks. So operator, I would like to open the call up for any questions.

Question-and-Answer Session

Operator

(Operator instructions) Frank Gillman of the DA Davidson & Company is online with a question. Please go ahead.

Frank Gillman – DA Davidson & Company

Hi, good morning.

Carlos Aguero

Good morning.

Frank Gillman – DA Davidson & Company

Yeah Carlos I guess just on your Re division, I mean this is one of your better quarters in quite some time and I’m just wondering now why you think it makes sense to look at a potential sale today?

Carlos Augero

Well one of the reasons as you just pointed, it’s improving profitability for downing. It’s—business is doing well. We have made – the board and management has made a determination to refocus our resources more towards the scrap metal recycling. So this will be a good time to explore the possibilities for that segment.

Frank Gillman – DA Davidson & Company

Okay, and then this is kind of reconciling those comments about wanting to be kind of more a pure play recycler and then the common and examining all options in the scrap segment. Are you referring more to the PGM and minor metals businesses within that or could you just elaborate that a little more?

Carlos Augero

Well, I think first is reviewing the alternative for the lab business and certainly is our internal review and, let’s say realignment, if you will, for our PGM business and how we intend to approach it. We have seen the volume there drop off significantly mostly by arguing because of some of metal we were handling was not being handled properly. So we want to reinvigorate our efforts there with some of the activities we’ve undertaken both in Buda, Texas and in northern New Jersey. But this time we haven’t made a determination of exiting or selling that segment. We’re only reviewing really the lead segment at this time.

Frank Gillman – DA Davidson & Company

Okay, and then just on the ferrous sites, how much did Buffalo contribute to ferrous volumes in the quarter. Was this above, below your expectations?

Carlos Augero

Well Buffalo is still ramping up. It’s still less than six months in operation. I think the contribution was about – in the quarter, I’d say about 20,000 tonnes approximately. And there was another 3,000 or 4,000 that was in transit, in shipment at the end of the quarter. But production I think was approximately was approximately 25,000 tonnes for the quarter, but not all it got out and hit the marketplace. And now contributing, one of the things that’s happening is that before we used to sell light iron from all of our yards, which contains about 70% metal and the rest is waste and non-ferrous. And now we’re converting all of that light iron into shred which it tends to shrink the number because you’re only yielding 70% of what you were selling before 100%. So the numbers can be a little bit tricky at this time until we complete that overall transition and are no longer really selling light iron, they’re just selling shred. So it will be – for the next few months we’ll be transitioning into that. So you won’t see the numbers click up as rapidly until we have developed sufficient third party receipts or procurement into that shredder.

Michael Drury

And Frank, this is Mike Drury. Please keep in mind that full production really didn’t begin until May with the shredder. Now it takes some times to bring an operation like this online and as we said in the past we are very pleased to just build out and start up. But the question is probably the best way to approach a startup as an endeavor this large. So, again don’t view the second quarter as a quarter reflecting full production or full capacity for that piece of equipment

Frank Gillman – DA Davidson & Company

Okay, great. Thank you. I’ll turn it over.

Carlos Augero

Okay, thanks.

Operator

Joe Jim Michael of Global Hunters Securities is online with a question.

Joe Jim Michael – Global Hunters Securities

Thank you very much. You receivable is growing and you’re beginning to see some of your customers stumble. Do you anticipate final increases in your reserves for bad debt and is this environment changing, your customer relationships and credit policies at all?

Carlos Augero

It has certainly changed our credit policies and now we don’t anticipate to have further write-offs. The one that we did experience was a significant one, but we don’t see other ones like that on the horizon. We have reexamined all of our credit limits and policies and also the strength of some of our consumers that we’re selling to and have made adjustments accordingly and we’re keeping the right close tab on the ones that we feel are of potential danger down the road and limiting what we sell to those. In addition we’re also exploring the possibility of insuring some of the ones that we feel are at greater risk of possible or future default.

Michael Drury

Joe, Michael Drury again. Keep in mind when you’re looking at receivables as a percentage of sales, in the past when we were selling a lot more PGM product, the consumers were basically advancing or paying 80% to 90% of the value of the load upon delivery. So the relationship itself to receivables was somewhat skewed with that payment arrangement. With less PGM sales now, you have a different relationship or ratio between sales and receivables. As we look at our aging and receivables, we’re very satisfied with where they’re at. And obviously we’ve always monitored the receivables very closely and we continue to do so.

Joe Jim Michael – Global Hunters Securities

Okay, fair enough. And just taking a step back from Metalico, the industry as a whole seems to be in a state of disarray right now and assuming no real renaissance of sort of US manufacturing construction, how do you see this playing out from an industry-wide perspective, Carlos, and really where is Metalico’s opportunity and/or risks in that environment?

Carlos Augero

Well I think the opportunities are what we outlined, is to continue to grow and to grow in a concentrated fashion in the areas where we operate in as we sort of become more of a peer player and be more significant in our own region. That’s number one. But the second is, I agree I don’t expect that there will be an immediate and a major resurgence of US manufacturing. And even on the absolute side of the supply chain, we don’t see that growing significantly. But the pie needs to be split differently or the pie needs to be consolidated. And I think that the most likely and the most rational and the most logical thing for the industry to do is to look at further consolidations and regions where there is a high degree of overlap. And we’ve been mentioning that in our calls and in our releases over the last few quarters that that is one of the things that’s constraining and impacting the profit margin of many of the companies.

And you don’t hear about many of them because many of them are privately held so they don’t disclose some of their numbers or any of their numbers. But if you look at a lot of the public companies and you look at their commentary, it’s all about tightness of scrap supply and it’s tightness of margin because everyone is bidding up raw material. So I think the logical thing is for there to be some level of consolidation to take out some of the excess capacity that currently exists in the scrap metal recycling, particularly in the area of shredding where you have over 300 in the nation and probably over capacity by I don’t know how many, but certainly over capacity by a lot of tons. So that’s what I think the thing that needs to be done and in the meantime while that doesn’t happen, we have to be more focused and more concentrated on how we buy our raw material and be more efficient so that we can lower our operating cost and be more competitive.

Michael Drury

And Joe, Mike again. Some of the issues that the industry is facing are unrelated to what’s going on in the US. The situation in Europe has not helped. The dollar up until a week ago had strengthened considerably virtually all of this year against the Euro, which meant European scrap which doesn’t have a home right now because Europe’s steel industry is still depressed – was much cheaper for the export markets.

On the last week or so we’ve seen strengthening of the Euro and weakening of the dollar which bodes well for our exports now again. So, some of the issues are homegrown, but many of the issues are completely beyond anyone’s control. And with some help from stability in overseas markets, I think some of the challenges that we’re facing with this constant fluctuation in currency will dissipate and make for a more manageable operating environment hopefully in the US.

Joe Jim Michael – Global Hunters Securities

Sure. I think that’s very fair. Just one last question and it’s kind of an unfair question, but following up on Carlos’ comments regarding consolidation, the sale of the lead business would have appeared to sort of more streamline the company or make it just a pure plan recycling side. I’m not sure if that signals that you’re putting yourself up, hanging aside of the company or if you’re necessarily looking to do that to reposition resources to build scale to take advantage of the weakness in the market.

Carlos Augero

I think the first thing that it does, Joe, is that it allows you to take advantage of opportunities that may be out there within our market areas by that realignment and basically having resources available for expansion. And I guess by default, it might make you more attractive should there be someone out there that aligns well with us that may wish to combine. It doesn’t mean that there is a ‘For Sale’ sign on the door, it means that if there is a logical alignment, it would make it certainly easier or at least more doable, if you will, if you’re more of a pure play. So, I think that all we’re doing is trying to strengthen the company and prove its competitiveness and other things may evolve as a result of that.

Michael Drury

And Joe, hopefully no one construes the statement about the lead segment as a ‘For Sale’. Obviously we will be looking if a transaction does take place to maximize the value in what is an extremely well-run, well-positioned and profitable niche business in an industry that will be very attractive to some folks. So again, we’re not selling the lead segment or looking to do something with the lead segment just to get out of it, we’re looking to maximize value in an effort that we hold dearly and we believe has significant upside. But at this time it may make more sense to look at alternative sport.

Joe Jim Michael – Global Hunters Securities

Sure, no that’s very fair. Thank you very much.

Operator

(Operator instruction) We have no further questions, thank you at this time.

Carlos Augero

Okay. Operator, why don’t we wait about 60 seconds and see if somebody else presses the question button and if not, then we will conclude the call.

Operator

(Operator instructions). Scott Huntington of Bodell Overcash Anderson is in cue with a question.

Scott Huntington –Bodell Overcash Anderson& Co, Inc.

Yes, good morning gentlemen. Not really a question. I’d just to applaud you folks for potentially turning over every stone that the term that Michael just mentioned, maximizing shareholder value is very key to I think everyone on this call. And I just want to extend the appreciation of what we think is a very wise, wise potential review and thank you.

Carlos Augero

Oh we appreciate your comment. Thank you very much Scott.

Operator

Chuck Clarke of Metalico is online with a question.

Chuck Clarke – Metalico, Inc.

How are you doing Carlos? Hey just one question for you. I know you said you guys in upstate New York Buffalo, you guys are paying less for scrap. How is that holding up your inventory levels?

Carlos Augero

Inventory levels are moving briskly. We are buying aggressively this month. We’ve raised pricing. Well I don’t know if this is the right forum to discuss individual pricing in New York State, but I can tell you that we’re getting good response to the current price structure and the flow is moving pretty well.

Chuck Clarke – Metalico, Inc.

Alright, thank you.

Operator

(Operator instructions) We have no further questions. Thank you.

Carlos Augero

Okay, we’ll give it another 30 seconds and if no one pops up then we will finish the call. Okay, operator being there is no further questions, I just want to thank everyone for joining us here today. For your interest in Metalico and its results and its development. And we look ahead to speaking with you once again when we present our third quarter results sometime in early November. Thank you very much and have a wonderful day. Thank you for joining the call.

Operator

Thank you for participating in the Metalico 2012 second quarter results call. This concludes today’s conference, you may now disconnect.

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