Yahoo Finance Radius Health, Inc. (NASDAQ:RDUS) Q2 2024 Earnings Call Transcript
Radius Health, Inc. (NASDAQ:RDUS) Q2 2024 Earnings Call Transcript April 4, 2024
Radius Health, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Radius Recycling Second Quarter 2024 Earnings Release Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [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 second quarter of fiscal 2024. In addition to today’s audio comments, we’ve 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, such as our statements about our targets, volume growth and margins.
Our actual results may differ materially from those projected in our forward-looking statement. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statement 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 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 2024 second quarter earnings call. On our call this morning, I’ll review our Q2 results and the market conditions impacting our performance. Stefano will then provide more detail on our financial performance and our capital investments and allocation priorities. I’ll wrap up with an update on the strategic actions we have underway to address current industry dynamics and create long-term value through the cycle and then we’ll take your questions. Let’s turn now to Slide 4 to review our second quarter highlights. Without question, current conditions in the scrap markets remain challenging. The cyclical headwinds of high interest rates and low manufacturing activity are creating tighter supply flows and compressing our metal spreads, and they are being exacerbated by continued inflationary pressures.
Our Q2 results reflected adjusted EBITDA of $3 million and an adjusted EPS loss of $1.04. While our second quarter volumes are always impacted by seasonality, this year they were particularly affected by unusually wet winter weather. However, on a year-over-year basis, our non-ferrous volumes increased in Q2 due in part to contributions from our strategic investments in advanced metal recovery technologies. The tough impacts of cyclicality are not new to us. What is different this time are the structural demand tailwinds, which are strongly aligned with our strategic initiatives focused on metal recovery technologies, volume growth, expansion of our 3PR services and mitigating the impact of current market conditions through actions that are within our control, specifically cost reductions, operating efficiencies and execution.
During the second quarter, we achieved substantially the full quarterly run rate associated with the $30 million productivity plan that we announced last October. We expanded this plan by an additional $40 million through a 10% reduction of SG&A expense and further production cost efficiencies. These initiatives included workforce changes, which have a profound impact not only on our colleagues who are no longer with our company, but also on the Radius team. Our team has shown tremendous resilience in managing through this challenging time and I want to thank them for their commitment and nimbleness in executing these changes while continuing to work safely and support each other. Let’s turn now to Slide 5 to review market trends. Scrap supply flows remained tight during the quarter on lower economic activity.
For the last 16 months, U.S. manufacturing PMI has been clocking in at below 50, the longest stretch of contraction in manufacturing activity that we’ve seen in over 20 years. The most recent March report, however, shows demand might be bouncing back, with the index rising to slightly above 50, up 2.5 percentage points from February, which may mark the beginning of a manufacturing recovery. Another indicator of scrap tightness is the average age of vehicles on the road. Driven by higher prices for used cars, lower auto production and higher financing costs, the continued increase in average age of vehicles on the road has resulted in lower scrappage rates of end-of-life vehicles. Other contributors to the constrained scrap supply include the relatively low demand for durable goods and increased scrap collection costs, including the impacts of inflation.
All of these tight supply conditions have led to a stickiness in scrap purchase costs, which have not moved in line with the changes in selling prices. Now, as you can see on this slide, ferrous export selling prices strengthened in the early part of the quarter, driven primarily by restocking globally, before softening in the second half of the quarter. Scrap prices in the U.S. domestic ferrous market were higher than export prices throughout the quarter and followed a similar trajectory. Since the end of the quarter, March ferrous export and domestic prices atypically weakened further, but preliminary April reports indicate a stabilizing domestic market and a slightly improving export market. Turning to non-ferrous, Base Metal Index prices for aluminum and copper remained range-bound during the quarter, impacted by a variety of factors including a softer U.S. dollar, supply tightness and weaker demand out of China.
Turning to finished steel, market prices in the quarter remained relatively steady, although the unusually wet weather on the West Coast during the quarter impacted construction activity beyond normal seasonality. We expect to see this correct itself over the next few months, along with increased demand related to the U.S. Infrastructure Bills. Our Oregon steel mill, with its range of low-carbon products, including our line of net-zero carbon emissions steel products, is very well positioned to benefit from these market movements. So now, let me turn it over to Stefano.
Stefano Gaggini: Thank you, Tamara, and good morning. Starting with the ferrous market dynamics in the quarter, average selling prices for ferrous improved sequentially by 8%, driven by the strengthening we saw in the early part of the quarter from restocking. However, the benefit of increased selling prices was mostly offset by higher scrap purchase prices, as tighter supply flow conditions continued to constrain our ability to expand spreads more meaningfully. Compared to our early January expectations, second quarter performance was also impacted by the decline in ferrous export prices during January and February, which was due in part to elevated levels of Chinese steel exports. In the first two months of calendar year 2024, China’s finished steel exports increased 33% year-over-year, impacting both steel production and ferrous scrap demand in Asia, the Middle East and Turkey.
Ferrous sales volumes were down 15% sequentially, as they reflected the constrained supply flows, including from winter seasonality and also delays in certain bulk shipments at the end of the quarter. Our second quarter results included a modest positive impact from average inventory accounting of $2 per ferrous ton in the higher ferrous price environment, which compared to $1 million detriment in the first quarter. We also recognized $2 million in insurance recoveries related to the shredder outage at our Everett facility that occurred in prior years, which compares to $4 million recognized in the first quarter. The share of domestic ferrous shipments was 49%, slightly higher than usual due to the export shipment delays. Our top sales destinations for ferrous exports were Bangladesh, Turkey and Peru.
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Now, let’s move to Slide 7 to discuss non-ferrous sales and the market dynamics, and provide an update on our non-ferrous investments. Non-ferrous sales volumes were up 7% year-over-year, reflecting benefits of our non-ferrous recovery investments and expansion of our platform and were down 3% sequentially on seasonality. We sold our non-ferrous products to 13 countries, with the major export destinations being India, Malaysia, Thailand and China. Average net selling prices for copper, aluminum and other non-ferrous products were up 3% sequentially on steady global demand and softer U.S. dollar. However, the prices of PGM metals continued to be impacted by subdued demand from U.S. and global auto producers, and were down 7% sequentially and around 50% from a year ago.
We continue to progress our investment in primary non-ferrous recovery systems, which drive the incremental metal recovery and the majority of the expected contribution from our program. Several of these primary systems are in various stages of commissioning and ramp-up, with two left to start construction on the West Coast, of which one awaits permitting approval. We work closely with our technology vendors to complete fabrication and installation, and continue to project completion of construction of the currently permitted primary systems by the end of the summer, with ramp-up to full operations to be reached by calendar year-end 2024. We also have already operational advanced separation systems that give us the option to process the mixed aluminum metal Zorba into higher-grade Twitch and other furnace-ready materials when market dynamics are supportive.
Overall, the contribution to performance from these systems was positive in the second quarter. Once fully operational, we continue to expect substantial returns from our investments in these technologies of approximately $10 EBITDA per ferrous ton. Now let’s move to Slide 8 to discuss our steel mill performance. Our finished steel products remained a significant contributor to our consolidated performance in the second quarter, although down sequentially on construction seasonality. Finished steel sales volumes of 114,000 tons were up 5% year-over-year and rolling mill utilization of 81% remained well above prior year levels of 75%. Both are a reflection of continued healthy demand from non-residential construction in our western U.S. markets.
Sequentially, sales volumes were down 11% due to seasonally lower construction demand, including from unusually prolonged periods of rain on the West Coast, particularly in California. Average net selling prices for finished steel were flat sequentially. We believe our mills tend to benefit from the expected demand created by the U.S. Infrastructure Bills. Now let’s move to Slide 9. Operating cash outflow for the second quarter was $55 million, reflecting a detriment from net working capital, primarily due to the timing of shipment and collections, including the impact of bulk shipments delayed at the end of the quarter. We expect this working capital item to reverse and benefit operating cash flow generation in the third quarter. Capital expenditures were $15 million during the second quarter.
We have lowered the projected capital expenditures for fiscal 2024 as a whole, which we now expect to be around $80 million, compared to $100 million previously. Approximately one-fourth will be for growth projects, including the completion of our non-ferrous technology initiatives and investments to support recycling services expansion, with the remaining spend for maintaining the business and environmental-related capital projects. Net debt was $360 million at the end of the second quarter, including the impact from the net working capital detriment due to the timing of shipment at quarter end. Availability under our credit facility remains sizable, with a borrowing capacity of $800 million and a maturity of August 2027. Net leverage was 30% at quarter end.
We also returned capital to shareholders through our quarterly dividend. The effective tax rate for the second quarter was unusual, reflecting an expense of approximately 4% on reported pre-tax results and 8% on adjusted non-GAAP results. The lower tax rate was driven primarily by the impact of changes in projected company performance, compounded by the recognition of a valuation allowance charge of $2 million on deferred tax assets in one of the company’s tax jurisdictions. Now, let’s move to Slide 10 to review our productivity improvement program. We continue to focus on ways to mitigate the current market conditions, inflationary headwinds and operating margin pressure through things that are in our control. Looking at some of the specifics regarding the new $40 million program, a primary component is from adjustments in headcount and other employee-related expenses, especially focused on SG&A type activities.
We’re also decreasing a sizable amount of non-trade procurement spend, increasing productivity in transportation and logistics, and further reducing certain discretionary activities such as travel, use of professional services and other outside services. Approximately half of the targeted quarterly run rate benefits from these new initiatives is expected to be achieved in the third quarter, with substantially all of the remainder by the end of the fiscal year. We expect to incur restructuring charges and other exit-related costs of approximately $6 million in connection with these measures, of which $3 million were incurred during the second quarter. Given we are still early in the quarter, we plan to provide a third-quarter quantitative outlook at a later time when trends of volumes and spreads and the impact of seasonality on both scrap flows and construction activity become more visible.
And with that, I’ll turn the call back over to Tamara.
Tamara Lundgren: Thank you, Stefano. Decarbonization is driving increased demand for recycled metals. Many low-carbon technologies are more metal-intensive than the technologies they’re replacing and recycled metals require less carbon to produce than mined metals. The anticipated structural deficits for metals such as copper and nickel, and the increased use of recycled metals by manufacturers seeking to reduce their environmental impact are also driving demand for our products and services. And additionally, the use of ferrous scrap in the steelmaking process is also expected to continue to grow significantly in the coming years and EAF steelmaking capacity, which uses ferrous scrap as its primary raw material, has been expanding and is projected to increase further.
While we do not control the pace of improvement in market conditions, we have seen in the past how quickly the cycle can turn. We expect scrap supply flows to benefit from a decline in U.S. interest rates and a recovery in global manufacturing activity, including auto production and to provide us with significant operating leverage benefits. Over the last 36 months, a period characterized by both historical margin highs and lows, our adjusted EBITDA averaged approximately $45 per ferrous ton. We believe that the completion of our investments in advanced non-ferrous recovery technologies should be additive to our recent historical average, and together with our cost reduction and productivity plans, should result in meaningful contributions to our margins independent of the timing of a market recovery.
Today’s market conditions won’t last forever. With our over 100 operating facilities, our low-carbon and net-zero carbon emission green finished steel products, our 3PR service and supply chain platform, and the cost reduction and productivity programs and strategic investments we have underway, we are well positioned to benefit as U.S. interest rates decline, global manufacturing activity recovers, infrastructure investment takes off and the transition to low-carbon technologies continues. Before we open the call for questions, I’d like to thank our employees again for their dedication to continuously servicing our customers and communities, supporting our suppliers and demonstrating the critical and essential role of our business and industry in the global economy.
And now, Operator, let’s take some questions.
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