Radius Recycling, Inc. (NASDAQ:RDUS) Q1 2025 Earnings Call Transcript

Radius Recycling, Inc. (NASDAQ:RDUS) Q1 2025 Earnings Call Transcript January 8, 2025

Operator: Good day, and thank you for standing by. Welcome to the Radius Recycling First Quarter 2025 Earnings Release Call and Webcast. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Bennett, Investor Relations. Please go ahead.

Michael Bennett: Thank you, Marvin, and good morning. I’m Michael Bennett, the company’s Vice President of Investor Relations. I’m happy to welcome you to Radius Recycling’s earnings presentation for the first quarter of fiscal 2025. In addition to today’s audio comments, we have issued our press release and posted a set of slides, both of which you can access on our website at radiusrecycling.com. Before we start, let me call your attention to the detailed safe harbor statement on Slide 2, which is also included in our press release and in the company’s Form 10-Q, which will be filed later today. As we note on Slide 2, we may make forward-looking statements on our call today. Our actual results may differ materially from those projected in our forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Slide 2 as well as our press release of today and our Form 10-Q. Please note that we will be discussing some non-GAAP measures during our presentation today. We’ve included a reconciliation of those metrics to GAAP in the appendix to our slide presentation. Now let me call — let me turn the call over to Tamara Lundgren, our Chairman and Chief Executive Officer. She will host the call today with Stefano Gaggini, our Chief Financial Officer.

Tamara Lundgren: Thank you, Michael. Good morning, everyone, and welcome to our fiscal ’25 first quarter earnings call. On our call this morning, I’ll review our quarterly results, the trends affecting our business and progress on the strategic activities we have underway to address industry dynamics and create long-term value through the cycle. Stefano will then provide more detail on our financial performance, our capital investments and our capital structure. I’ll wrap up with some takeaways from our sustainability report that we issued in mid-December and then we’ll take your questions. But before we begin, I’d like to take a moment to express our support for those of you who are being impacted or who have family or friends who are being impacted by the wildfires in Southern California.

Our thoughts and prayers are with you. Before turning to the next slide, I’d also like to take a moment to recognize our employees for their continued strong safety performance. After delivering safety results in fiscal ’24 that were the second best in our company’s history, this quarter, the team achieved almost a 50% sequential reduction in our total case incident rate and 97% of our sites experienced 0 lost time injuries. These strong results reflect our team’s engagement and commitment to creating a safe work environment and a sustainable safety culture. Let’s turn now to Slide 4 to review our first quarter highlights. While market conditions during the quarter were more challenging than a year ago, our year-over-year operating results remained stable.

The difference between our adjusted EPS loss of $1.33 compared to a year ago was primarily due to an income tax detriment associated with our deferred tax assets. The contribution from our recycled metals business improved versus a year ago, driven by benefits realized from our cost reduction and productivity measures implemented in fiscal ’24 and stronger nonferrous demand, which offset the tight scrap environment and the softer global ferrous markets. The contribution from finished steel declined year-over-year due to weaker domestic steel conditions and a scheduled maintenance outage. Our steel mill utilization of 81%, while down sequentially, was still higher than the U.S. average of 75%, reflecting relatively stronger West Coast demand.

We achieved nearly breakeven operating cash flow during the quarter and returned capital to our shareholders through our 123rd consecutive quarterly dividend. The biggest headwind to our performance is the pressured U.S. manufacturing sector, which has been in recessionary territory for 2 years. The last time we saw such an extended manufacturing downturn was over 20 years ago. The outlook for a manufacturing recovery, however, is positive with U.S. consumer and business confidence surging since November and a consensus across the political spectrum that revitalizing our manufacturing sector is critical for U.S. economic growth and national security. A recovery in the manufacturing sector should both ease the constrained scrap environment and drive more demand for ferrous and nonferrous recycled metals.

From a long-term perspective, the demand for recycled metals continues to have a strong upward bias, underpinned by several structural trends, U.S. industrial reshoring, continued growth in EAF steelmaking production, maximizing the use of recycled metals and production processes and the transition to metal-intensive low-carbon technologies. Importantly, our strategic initiatives focused on metal recovery technologies, volume growth and expansion of our 3PR services are strongly aligned with these secular growth drivers. So let’s turn to Slide 5 for a deeper dive into market conditions. During the quarter, export prices for recycled ferrous metals decreased, driven by softer global steel demand, including the dampening effect from elevated levels of Chinese steel exports.

In the last 12 months through November 2024, Chinese steel exports to countries in Asia, Central and South America and Turkey have risen by approximately 25% versus a year ago, reducing steel manufacturing and associated ferrous scrap demand in these regions as a result. Domestic ferrous scrap prices during Q1 were relatively flat sequentially, but down significantly from a year ago. Finished steel prices also softened during the quarter as purchasers reduced inventory levels heading into the end of the year. While the construction markets were softer due to interest rate uncertainty and inflationary pressures on construction costs, the Dodge Momentum Index, which is a 12-month leading indicator of nonresidential construction spending is signaling strong growth.

Moving to nonferrous. Although average nonferrous prices decreased sequentially, they remain up year-over-year on healthy global demand for copper and aluminum. One of the most significant drivers of change to our operating margins has been the reduced supply of recycled scrap metal. As the U.S. manufacturing sector has gone through a cyclical downturn, our markets have experienced a tightening in the availability of end-of-life vehicles, obsolete white goods manufacturing scrap and scrap from fewer construction and demolition projects. These constrained supply conditions have pressured purchase costs for raw materials, leading to margin compression. In addition, auto production that is still below pre-pandemic levels, together with financing costs for new and used cars that are still comparatively high, have contributed to the average age of vehicles on the road reaching their highest level on record.

But while the weaker environment that we’re in today presents challenges, we’ve experienced cyclical downturns and volatility before, and we’ve demonstrated our ability to navigate effectively through these periods by focusing on what we can control, including productivity, customer service, technology and platform diversification. As market conditions recover, we are very well positioned to benefit from the expected increased demand for recycled metals associated with investments in infrastructure, industrial reshoring, growth in U.S. electric arc furnace steelmaking capacity and the transition to metal-intensive low-carbon technologies. So let’s turn now to Slide 6 for an update on our strategic priorities. Our strategic initiatives are strongly aligned with the secular growth trends I mentioned earlier and can be summarized as follows: First, our investments in advanced metal recovery technologies.

This is a multisite, multiyear investment program focused on increasing the recovery of nonferrous metals from our shredding process and creating product optionality by enabling us to create furnace-ready products based on demand and price. The majority of the returns from these investments should come through our results in fiscal ’25. We estimate these investments should return over $40 million in annual EBITDA after full deployment. Second, our trademark 3PR Service and Solutions business line. Our 3PR service and offering enables our customers to increase their recycling rates, reduce materials going to landfills, lower their carbon footprint and provide enhanced sustainability reporting. This is an asset-light business, typically with multiyear contracts that provides a counterbalance to our more cyclical core recycling operations, and it’s highly aligned with secular growth trends.

Reflecting this steady growth, our 3PR business line contributed over 10% to our recycled metals volumes in fiscal ’24. Third, our cost reduction and productivity program. In the first quarter, we achieved a 6% reduction in adjusted SG&A costs compared to the prior year, reflecting the cost savings initiatives we implemented during fiscal ’24. Additionally, as part of our continued focus on optimizing production efficiencies, we expect in fiscal ’25 to benefit from the monetization of certain discrete real estate assets in locations where we can both substantially consolidate or reposition our business activity and unlock the associated real estate value. We expect to close on two transactions in the second half of the year and raise net proceeds of approximately $35 million.

Benefits from these initiatives are already contributing to our financial performance. And as the manufacturing sector improves and the global steel market returns to equilibrium, we expect the benefits of our actions to become much more visible in our margins and EBITDA and to provide a substantial boost to future financial results. So now let me turn the presentation over to Stefano.

Stefano Gaggini: Thank you, Tamara, and good morning. On a year-over-year basis, we were able to achieve stable operating results despite the deterioration in market conditions for ferrous and especially for finished steel over the last 12 months. In addition, last year’s results had benefited from insurance recovery gains of $4 million. The contribution to consolidated results from our recycled metals platform improved over this period, driven primarily by stronger nonferrous demand and by the productivity and cost savings program we implemented over the last year with an aggregate quarterly run rate of benefits of nearly $20 million. This more than offset the impact of the softer global ferrous markets. Finished steel contribution was significantly lower as weaker demand and prices led to a 10% compression in metal spreads year-over-year, which was further compounded by higher conversion costs due to lower mill utilization in the first quarter of fiscal ’25, including from a scheduled maintenance outage.

On a sequential basis, there were two primary drivers of the decline in adjusted EBITDA performance. First, slightly more than half of the reduction in EBITDA was associated with a decline in sales volumes, primarily due to seasonality and, to a lesser extent, timing of shipments. Ferrous and finished steel volumes each were down 11% and nonferrous volumes were down 14%. Lower volumes also contributed to margin compression through the loss of operating leverage, including at our mill due to lower utilization. And second, there was a reduction in average net selling prices for our ferrous, nonferrous and finished steel products that led to metal spread compression compared to the fourth quarter. The spread compression also included a detriment from volatility in nonferrous prices during the quarter.

Adjusted SG&A expense was down 6% year-over-year, driven by the measures we implemented during fiscal ’24, targeting a reduction of 10% in SG&A. It is worth highlighting that our results in the first quarter reflect elevated costs of several million dollars for certain ongoing legal matters, which we expect to be temporary and recede in the second half of fiscal ’25. Our reported SG&A expense was 10% lower year-over-year as it benefited from a $2 million insurance recovery gain related to a legacy environmental matter, which is excluded from adjusted results. Turning to other ferrous dynamics in the first quarter. The share of domestic ferrous shipments was 43%. Our top sales destinations for ferrous exports were Bangladesh, Turkey and India.

Ferrous average net selling prices were 3% lower sequentially, primarily driven by weaker export demand amid continued pressure from elevated levels of Chinese steel exports. Domestic prices were stable during the first quarter. In the lower price environment, the impact of average inventory accounting was a detriment of $1 per ferrous ton in the first quarter, similar to the levels seen in the fourth quarter. Now let’s move to Slide 8 to discuss nonferrous sales and provide an update on our nonferrous investments. Nonferrous sales volumes were down 14% sequentially, primarily reflecting seasonality on flows and to a lesser extent, timing of sales. On a year-over-year basis, volumes were down 2%. We sold our nonferrous products to 13 countries with the major export destinations being Malaysia, Thailand and India.

Average net selling prices for our recycled nonferrous products were down 6% sequentially, reflecting the decline in nonferrous market prices from the multiyear peaks reached earlier in the year. As you can see in the bottom right graph, price volatility for nonferrous metals was significant in the last 6 months. Notwithstanding the volatility, prices for nonferrous products remain at healthy levels as evidenced by the 12% rise in average net selling prices on a year-over-year basis. We continue to progress the deployment of our advanced primary nonferrous recovery systems, which drive the incremental metal recovery and the majority of the expected contribution from our investments in technology. We advanced our ramp-up activities on several of these primary systems during the quarter.

As of the end of the calendar year ’24, we have now completed construction and started the commissioning of the last of the currently permitted primary systems. Overall, the contribution to performance from these systems was positive in the first quarter. We continue to expect to see a trend of increasing returns from these investments in the next couple of quarters and target the substantial full ramp-up of the permitted systems by Q3 of fiscal ’25. Once fully operational, we continue to expect substantial returns from our investments of approximately $10 EBITDA per ferrous ton in normal market conditions. Now let’s move to Slide 9 to discuss our steel mill performance. Finished steel sales volumes of 125,000 tons in the first quarter were down 11% sequentially due primarily to construction seasonality in our Western markets.

Compared to the prior year, volumes were down 3% — average rolling mill utilization was 81%, down from 97% sequentially and from 95% in the prior year, including due to the impact of a scheduled maintenance outage during the first quarter of fiscal ’25. Average net selling prices for finished steel were down by 2% sequentially and 7% year-over-year as demand in our West Coast market has softened in the elevated interest rate environment. We believe our mill will benefit from the anticipated demand associated with the U.S. infrastructure bill. However, as of yet, this demand has yet to meaningfully come into play in the construction market. Now let’s move to Slide 10. Operating cash flow for the first quarter was near breakeven, including a modest benefit from working capital from lower volumes and prices and the timing of shipments and collection.

We continue to manage and align capital expenditures to current performance trends and invested $12 million in CapEx in the first quarter. Looking ahead, we now project our fiscal ’25 CapEx investments to be around $60 million. Around 20% of the spend will be for growth projects, including investments to support the continued expansion of recycling services and completion of our nonferrous technology initiatives with the remaining spend for maintaining the business and environmental-related capital projects. As Tamara mentioned, we expect asset monetization transactions with net proceeds of $35 million to contribute to free cash flow generation in the second half of fiscal ’25, subject to customary closing terms. Net debt was $430 million at the end of the first quarter.

Our credit facility with a capacity of $800 million and a maturity date of August 2027 carries interest costs that are linked to short-term market rates. As a result, we benefit from the cuts in short-term interest rates by the U.S. Federal Reserve, which have aggregated to 100 basis points since September. The effective tax rate for the first quarter was an expense of 11% on reported pretax results. As mentioned during last quarter’s earnings call, because we are in a valuation allowance position on our deferred tax balances and based on how the underlying mechanics work, our tax rate is subject to significant projection estimates during interim quarterly periods. Therefore, we expect to see meaningful quarter-to-quarter volatility in our tax rate due to changes in those estimates, including from company performance trends, which is what occurred in the first quarter and created a tax expense on a pretax loss.

Compared to a year ago, the income tax rate drives the substantial majority of the difference in EPS results as in the prior year, our tax rate reflected a more normal profile without the impact of a valuation allowance. We do not expect to be a cash taxpayer in fiscal ’25, given the availability of net operating loss carryforward. Looking ahead at the next few months, we expect to see typical winter seasonality in our recycling metals and finished steel sales volumes in our second fiscal quarter before spring seasonality in both flows and construction activity kicks in. We also anticipate a meaningful ramp-up in contribution from our technology investments to continue to see the benefits from our productivity and cost reduction program, including an abatement of the currently elevated legal costs starting in the second half of the fiscal year.

And with that, I’ll turn the call back over to Tamara.

Tamara Lundgren: Thank you, Stefano. In mid-December, we issued our 11th Sustainability Report, which describes our progress towards our multiyear sustainability goals. I’ll highlight just a few examples, and I encourage you to visit our website to view the report. We reduced our Scope 1 and 2 emissions at our recycling operations by 30% versus our 2019 baseline. In addition, we maintained 100% net carbon-free electricity usage across our operations for the fourth consecutive year. We are meeting these goals primarily through significant investments in state-of-the-art emissions control systems for metal shredding operations and more efficient operating equipment. These achievements and many others would not have been possible without our employees living our core values of safety, sustainability and integrity.

I’m very proud of what our team has accomplished. During a period marked by challenging market conditions and geopolitical uncertainties, our company’s steady progress reflects the agility of our workforce, the resiliency of our culture and the strength of our platform. We have an exciting year ahead of us as we execute our strategic priorities, and we are well positioned to benefit from the positive structural trends driving increased demand for recycled metals. I’d like to thank our employees for their dedication and our customers, suppliers and communities for their partnership. And now, Marvin, let’s open the call for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Samuel McKinney of KeyBanc Capital Markets.

Samuel McKinney: Starting in the export market. The first quarter export ferrous pricing posted its softest quarterly level over the last handful of years. Can you talk about the elevated export levels still coming out of China? Any potential relief on that front? And what else you’re seeing in the export market?

Tamara Lundgren: Sure. So as you highlighted and as we mentioned, the Chinese steel overproduction has clearly had a dampening effect on markets around the world, in Asia, in Central and South America, in Turkey and elsewhere. What we expect is we do expect to see a pullback of this excess production and excess exports from China. We expect to see the pullback because other countries are going to push back on these cheap exports that hurt their domestic steel production. We’ve seen this dynamic before and we have seen how quickly it can turn. So we are anticipating a correction. We can’t give you the time but we do anticipate a correction.

Samuel McKinney: Okay. And then my next question would be on interest expense. First quarter interest expense was relatively flattish sequentially, but that number rose about $4 million year-over-year. I know a recent amendment to the credit facility has increased your cost of money, but any info you can give us on how you plan to manage the debt and that rising interest expense moving forward?

Stefano Gaggini: Sam, this is Stefano. So on the first part of your question, the impact of the cost of the amendment to the credit facility that we executed back in June, is now fully reflected in our interest cost profile in Q1 ’25. Those were onetime costs that were paid in cash at the time of execution of the amendment. From an accounting perspective, they are amortized interest expense of the remaining life of the facility, which expires in August ’27. So at this point, those costs that flow through interest expense are noncash and they were not material to start with. On the second part of your question, obviously, I mentioned in my prepared remarks, the interest rates decline that we have seen with a reduction of over — of 100 basis points since the Fed started cutting the rates back in September, that does and will benefit our interest costs since we — our line of credit is based on short-term interest rates.

And because of the timing of when those reductions occurred, the benefits are only very partially reflected in our fiscal Q1 and will be, therefore, reflected in full in Q2. And overall, from a debt perspective, we have a line of credit with a capacity of $800 million. We have $430 million at the end of Q1 outstanding. And really, that level of debt is also reflective of the investments we made in the last couple of years and including on the nonferrous recovery technologies, where we now expect, as Tamara mentioned and I mentioned, we expect those returns to expand and have a strong payback. So we view our liquidity from a positive perspective. The path that we’re looking forward is clearly improving the financial performance and operating cash flow generation through self-help initiatives or strategic initiatives.

And as Tamara just mentioned, expecting market conditions to recover as well. So those are the catalysts. We have managed and aligned our CapEx and flex the CapEx to align with cash flow generation we expect $60 million in CapEx spend in FY ’25. We have asset monetization opportunities. We already two properties under contract with expected cash proceeds of $35 million. Those will be supportive of free cash flow generation and the interest cost also going lower. So from that perspective, that’s the context on the debt and interest costs.

Operator: I’m showing no further questions at this time. I’d now like to turn it back to Tamara Lundgren for closing remarks.

Tamara Lundgren: Thank you, Marvin, and thank you all for your time today. We look forward to speaking with you again when we report our second quarter results in April. In the interim, stay safe and stay well.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.